Ability to Refund or Recharacterize '03 Defl Due to Failure of 401(a)(4) General Test

[Guest Dash04]

My client maintains a cross-tested profit sharing / 401k plan. The owner's wife, who receives comp. of about $30K, arranged to have a $12,000 401k contribution made in late December, 2003.

It turns out that this 401k deferral causes the plan to fail the general nondiscrimination testing, which is performed on a cross-tested basis (the ave. benefit prong). Note that the plan made 3% safe harbor contributions so as to automatically be deemed to pass the ADP test.

My question is ... what corrective action is available? Can a portion of the 401k deferral amount be refunded to the wife? Can a portion of the deferral be recharacterized as a 2004 deferral? Would it matter if the money was not actually deposited into the self-directed plan account until Jan., 2004? Note that the general test will pass if $7,500 of the 401k deferral is refunded or recharacterized.

Thanks for your help and input.

[Blinky the 3-eyed Fish]

In order of your questions:

1.401(a)(4)-11(g)

No

No

No, if from 2003 pay

In other words, it looks like this was not thought out prior to her deferring so much and you can't get out of it. Is it possible she didn't meet the statutory eligibility requirements to enter the plan? If so, you could try testing using otherwise excludables. If not, try the amendment cite above a bring up some people with additional contributions.