ACP Failures of contributions that have not been deposited

[Guest lfriede]

A plan failed the ACP test for the 2003 plan year. The test was completed by 3/15 and the employer would like to make refunds by 3/15. However, the employer will not be making the matching contribution until sometime later in 2004. How is the ACP test corrected. For continuing participants who already have a match balance as of 12/31/03, there is money from which refunds can be made. But for participants who are receiving a match for the first time, there is no money from which refunds can be made. Any suggestions on how we handle this?

[Archimage]

You cannot do ACP testing until after the match is made.

[Guest lfriede]

Reg. Sec. 1.401(m)-1(b)(4)(ii)(A) says that a matching contribution is included in the ACP test for a plan year if it is allocated to the employee's account as of any date within the plan year and is actually paid to the trust no later than 12 months after the close of the plan year.

These contributions will be allocated as of 12/31/03 and will be contributed within 12 months after the close of the 2003 plan year.

[Archimage]

That is true but you cannot refund matching contributions that are not made yet. Please give me a reg that shows differently. It would make my life easier.

[Guest lfriede]

If I understand your reply, you do agree that the regulations require these contributions to be included in the 2003 test before they are actually contributed to the trust, correct? That's the first issue.

The second issue is, once the test is done, how do you handle ACP failures? The regulations give no guidance, so I have nothing to cite. That's why I posted the question - I'm looking for comments since I have nothing concrete to go on.

The only solution I can think of is since the employer wants to wait until later in the year to make the contributions, they'll have to wait to complete the ACP refunds until after the contribution is made and will have to pay the 10% penalty since it's occurring after March 15.

[Archimage]

I agree with your solution. I know of no reg that gives you the authority to refund ACP corrections before the match is made.

[rcline46]

Please go to your document and read the matching contribution section VERY CAREFULLY.

You just might find the document can be interpreted to say that you CANNOT CONTRIBUTE matching contributions which cause the ACP test to fail!!!!

I would bet very few have actually read what their document says in the section on matching contributions and correction of matching contributions. Some very fun stuff in there.

[Guest duh]

I agree, you should review your basic plan document very carefully. I've seen more than a few that will not allow you to "knowingly violate a test/plan limit". Since your year-end data is available, you may not be able to make the full match intended.