Excess Annual Additions and ADP/ACP Test

[Guest ArrowMatt]

Here's the situation- the plan allows for a maximum 50% contribution on a pre-tax and 50% contribution on an after-tax basis. The match formula is 200% upto 3% and 50% for the next 2%. So you put in 5% you get 7%. The match is made after the plan year end.

The question is this- we have a HCE how contributed the maximum $12,000 pre-tax and $28,000 after-tax. He has reached the annual additions limit in 2003 of $40,000. Basically, he just screwed him self out of $14,000 match. What happens if the plan fails ADP testing and he has to take a refund of $3,000. Are we able to then give him a $3,000 match? This would seem to cause a problem because then we would have to recalculate the ACP test.

I seem to think that annual additions is calculated once at year end and that's it. So, basically, he's screwed.

Another question: If the plan fails ACP testing, which comes out first? Match or After-tax? Does this have to be in the document?

[Blinky the 3-eyed Fish]

Before getting into any of your questions look at the document as it should order which dollars are limited or can be removed for 415 purposes. In other words, he may still receive the match and the after-tax or deferrals would be refunded. Report back.

[Guest ArrowMatt]

Here's the provision from the document:

First, if the Participant's Annual Additions exceed the maximum permissible amount as a result of (i) a reasonable error in estimating the Participant's Compensation, (ii) a reasonable error in estimating the amount of Pre-Tax Contributions that the Participant could make under Code Section 415 or (iii) other facts and circumstances that the Internal Revenue Service finds justifiable, the Committee may direct the Trustee to return to the Participant first his After-Tax Contributions and next his Pre-Tax Contributions for such Plan Year, to the extent necessary to reduce the excess amount. Such returned After-Tax and/or Pre-Tax Contributions shall be ignored in performing the discrimination tests of Article XX.

[Blinky the 3-eyed Fish]

Regarding the 415 problem, your document language calls for the after-tax dollars to be removed first. Therefore, you can return $14,000 with earnings (or $12,000 if the participant is 50 or over in 2003) and the participant would get the full match.

I am not sure exactly what you mean by "...if if the plan fails ADP testing and he has to take a refund of $3,000. Are we able to then give him a $3,000 match?". I assume this was in the context of the 415 limit problem, but because nondiscrimination testing is run AFTER the 415 limit is solved, this is a non-issue.

Regarding your last question, I would surmise your document would address this.

[Guest ArrowMatt]

In absense of any plan document provision or guidance, can the Plan Sponsor decide that since the participant has reached the maximum 415 limit before the match is allocated, that since you do not want to violate 415 limits, not to contribute the match to the participant.