ADP corrective distribution

[Belgarath]

I THINK I'm groping toward a proper understanding of this, but since there are lots of 401(k) experts on these boards, thought I'd check. Have I got this right:

Suppose the HC deferred 6,000. There's a 50% match, so there's a 3,000 match.

Once the ADP test is run, it is determined that 1,000 must be distributed to the HC. (Assume no catch-up, no earnings, and that the correction method will be distribution)

This leaves 500 in match that must also be corrected. If I'm reading the regs correctly, this CANNOT remain unallocated and placed in suspense to be used as an advance - it must be used as a forfeiture.

Have I got this right? Or is there an alternative, assuming the distribution correction method was used. That is how I read the regs - seems rather foolish to me, but I haven't bothered to consider whether there is a good reason for it or not. Maybe there is! Thanks in advance.

[Archimage]

I agree with your assessment.

[Belgarath]

Thanks. You know, I don't work with 401(k) administration on a nuts and bolts basis. But I have a great deal of respect for those who do. Taking all of these regulations, and translating them into real life to handle all the bizarre screw-ups that happen at the employer (and TPA) level, then having to reconcile them with various funding and accounting platform administrative restrictions, borders on the insane. It isn't so bad when everything stays within the pigeonholes, but once you get outside of that, look out!

[Tom Poje]

an exception would be if ACP test also failed. in that case, you could distribute ACP first then distribute ADP

[Kirk Maldonado]

Tom Poje:

Wouldn't the participant have to be fully vested before you could distribute the ACP amounts?

[Archimage]

You would distribute his vested portion.

[Tom Poje]

I've seen it written up in an example as follows.

match refund = 1000

balance = 3000

ee 60% vested.

you could distribute 600 and forfeit 400

or

balance = 3000

vested balance = 1800

distribute the full 1000.

this leaves a balance of 2000

vested balance = 800 (1800 - 1000)

so ee gets a bizarre statement which says

end bal 2000

60%

vested bal = 800

and ee says wait a second 800 / 2000 = 40%. what is up with that?

This is actually a good deal for the hce- once he becomes 100% vested the problem goes away! and he hasn't forfeited any $.

fortunately most hces are 100% vested to start with and you don't normally have a problem.