related match for ADP failure

[Tom Poje]

Plan fails ADP test.

a discretionary match was provided weekly, but was stopped mid year.

so, any guesses on the calculation of related match.

Is it first deferrals in and therefore first deferrals out, so there is related match, or is it averaged over the whole year (ugh) or last deferrals in are refunded and therefore no related match.

[rcline46]

I don't think there will anything on this particular issue. However, the ADP/ACP is an annual test. The fact that matching contributions may have been discretionary, calculated and deposited on a per pay basis and suspended/discontinued should have nothing to do with the test.

Since I believe the test is independent, then any related match is independent.

Now we know that the IRS THINKS if there is a failure it was either all year or the FIRST money in (cf. the tax return that must be amended if the failure is discovered within 2 1/2 months). But that is not important for related match, because related match must be forfeited, not given back.

Now if you do the ACP test first and have a failure, then I would treat it the same as and ADP failure.

[Tom Poje]

so how would you handle the following: (and I'll keep it simple)

HCE defers 100 each month all year

gets 50 each month for 6 months, then company stops the match.

adp refund is 300.

so, is there related match and how much?

it was a 50% match. you cant really average things over the whole year, because deferrals change, etc. people might have stopped deferring because match was stopped, people terminate during the first half of the year.

Thus, I would say it does make a difference if matching on a payroll basis.

so it really matters if it is first in first out.

[rcline46]

Argument 1. Because the IRS treats ADP failure as First In - then the related match would exist because it was 'related to' the first in contribution.

Argument 2. If there is an ACP failure, the do the ACP test first - may reduce or eliminate any related match even under argument 1.

Argument 3. There is no related match because the match was not made for the entire year OR the formula can be restated to an annual basis.

In other words, I have no idea and would plan audit roulette.

[E as in ERISA]

The issue with orphan matches is you potentiallly have a higher rate of match for the HCE. That's a discriminatory benefit, right or feature. To keep it simple, assume that the HCE in your example earns $10,000 a month (and defers $100 all year and gets a match of $50 each of first six months). An NHCE earns $5,000 a month and defers $50 and gets a match of $25. Going in to test, HCE's rate of match was 25%. NHCE's the same. After refund of $300, HCE's rate of match is 33-1/3% ($300 match on $900 contribution). But NHCEs match is still only 25%. Better to be conservative when discrimination is involved. But I don't see why first in, first out isn't a reasonable method.