ADP failure, HCE took hardship in prior year

[Guest Emiman]

Client failed the ADP test. There is only one HCE (owner) who took a hardship distribution in 2003 for all that he could. After the year end testing was completed it was determined the HCE does not have enough money in the plan to cover the ADP correction.

What are our options here? It seems pointless to contact the HCE to have him "give back the money" - when he was in a hardship situation to begin with, just so we can turn around and complete the correction the right way?

I would rather correct the 1099. However, I read that when it is not a full distribution from the plan (in the case of a terminated HCE) then it is not that clear.

Any advice would greatly appreciated.

[JanetM]

Am confused, if HCE took hardship his deferrals should have stopped. Only if hardship was taken late in year does this make sense.

Without doing detailed research, I would take the deferrals to zero balance and 1099 would be for amount available to correct test.

Just a gut reaction.

[Guest Emiman]

Thanks for the reply Janet, the hardship did occur late in the year. The individual contributed about $9,000 from January through August, took a hardship in October of $17,000 leaving about $800.00 fair market value in the deferral account today (no match or ps in this plan). The ADP test reports a refund of $2900.00 necessary to correct the test.

If I am understanding correctly, your suggestion is to withdraw the remaining amount in his deferral source (about $800.00) which would bring his account to zero and code it on the 1099 as a current year excess contribution. Sounds like a logical solution to me! Anybody else have any suggestions?

Thanks for your advice and help!

[pmacduff]

I would just correct the 1099-R form and issue 2 showing one as the refund of deferrals ($2900) and one with the balance ($14100) as a hardship withdrawal. Neither are eligible rollover distributions anyway, so you don't have any issue there with the withholding. I would not take any more $ from the plan since the participant already received more than the failed test required. I believe you need to show the $2900 as a contribution excess to tie back to your test & correction. My opinion is that this is a mechanical correction for the plan reporting the distribution of $ correctly. I suppose the hardship paperwork should also be modified and an explanation attached as to the decrease from the original amount.