ADP test fails, refund, and subsequent deferral limits

[Belgarath]

I'd appreciate confirmation if I've got this right.

Suppose you have a plan year 7-1-04 to 6-30-05. You have a highly compensated employee (not eligible for catchup) who deferred 13,000 from 7-1-04 to 12-31-04, then deferred 14,000 from 1-1-05 to 6-30-05.

While this is permissible for 402(g) limits, as you might expect, it failed the ADP test, and some amount must be refunded - let's say 10,000.

All set with tax issues, etc. The question posed was - since this 10,000 is being distributed, can the employee defer another 10,000 between now and the end of 2005? In other words, does a refund of deferrals due to ADP failure "reduce" the deferrals counted towards the 402(g) limit?

I believe the answer is no. The deferral stands, and this person cannot defer anything more in 2005. Possible I missed it, but I didn't see anything in the regs to allow otherwise in this situation.

Thanks!

[Tom Poje]

I would think of it this way:

what shows up on his W-2. the amount of deferrals is never reduced by any refund.

[Bird]

I think this thread says yes you can:

http://benefitslink.com/boards/index.php?showtopic=30365

(Sorry I don't know how to make a clickable link.)

It was last posted Oct 16 2005 if it's easier to find that way.

[Tom Poje]

I'm not sure about the cross referenced site.

the 1.401(k).... refers to Roth deferral

the 1.402(g) site refers to the coordination of excess deferrals and excess contributions -the amount of excess deferrals that may be distributed is reduced by excess contributions.

The ERISA Outline Book has an excellent example (11.302 - 2005 edition)

ee deferred 14,000 in 05 and 15,000 in 06.

plan fails adp test, 8000 refunded.

so now ee defers an additional 8000. ee has an additional 8000 in excess deferrals. reason: under coordination rules the 8000 refunded for failed adp test relates to plan year BEGINNING in 2005.

the additional 8000 in excess deferrals relates to 2006, because excess deferrals are always calendar year.

ugh, I got a headache just reading the thing.

[Bird]

Yes, the 1.401(k) reference is the applicable section for Roths.

Here is the 1.402(g) reference:

(6) Pension Coordination with distribution or recharacterization of excess contributions. The amount of excess deferrals that may be distributed under this paragraph (e) with respect to an employee for a taxable year is reduced by any excess contributions previously distributed or recharacterized with respect to the employee for the plan year beginning with or within the taxable year. In the event of a reduction under this paragraph (e)(6), the amount of excess contributions includible in the gross income of the employee and reported by the employer as a distribution of excess contributions is reduced by the amount of the reduction under this paragraph (e)(6). See §1.401(k)-2(b)(4)(i). In no case may an individual receive from a plan as a corrective distribution for a taxable year under paragraph (e)(2) or (e)(3) of this section an amount in excess of the individual's total elective deferrals under the plan for the taxable year.

That sure seems to say that if you have refunds under an ADP failure (excess contributions), that they reduce the 402(g) excess (excess deferrals). It wouldn't be the first time I looked at the Code and/or Regs and didn't understand it, but if it doesn't say that, I'd appreciate a translation.

FWIW.

[Tom Poje]

I don't think the Outline Book is disagreeing, but it depends on what year is being referenced.

it stresses the idea 'plan year beginning'.

so I think it would say the following:

plan year 7/1/05 - 6/30/06.

plan fails ADP test so $1000 refunded. it then says this refers to plan year begining in 05.

if ee had excess deferrals in 05 as well, then the two are coordinated and one refund can offset another.

in the particular example, the excess deferral was not in 05, but 06 but the refund related to deferrals in a plan year beginning in 05, so cooridnation does not come into play.