ADP Test Failure Determined after HCE paid out.

[Guest Factor]

We have encountered a situation were the failure of an ADP test was determined after the sole HCE required to take a distribution rolled over his entire account balance. It is my understanding that the Plan is in compliance because the excess contributions were distributed on a timely basis; is this correct? Obviously, part of the amount rolled over was not eligible, and the taxation for the participant was incorrect. Does anyone know what should be done at this time?

[pmacduff]

We advise the participant that the refund portion was an ineligible rollover and must be distributed from the IRA. We then issue 2 1099-R forms, one for the refund and one for the rollover.

[wmyer]

See this link to the on-point ASPPA Q&A:

http://www.reish.com/practice_areas/Techni...s/IRStip149.cfm

[Mike Preston]

It was nice of the IRS to provide that "clarification." The regulation in question appears to be specifically addressing the case where the HCE is paid out DURING the year in question. The Q&A is more broad in that it allows for the case where teh HCE is paid out AFTER the year in question.

Without the IRS' clarification I was reluctant to state that the regulation was applicable.