Failure to suspend deferrals following hardship withdrawal

[Belgarath]

So let's say in September of 2005, a participant takes a hardship withdrawal. However, the employer fails to suspend deferrals. This is not discovered until July of 2006.

An apparently acceptable fix is to treat the deferrals for the 6 month suspension period as discontinued, and the participant will forfeit the deferral and any match. The employer will then make the participant "whole" in his paycheck currently, and use the forfeited deferrals/match as a current employer contribution.

Question - I would assume such a fix requires going back to re-run the ADP testing for 2005? It seems unlikely that it could be avoided if they are being treated as never made, but sometimes truth is stranger than fiction...

Thanks.

[Belgarath]

Any thoughts on this?

[Jim Chad]

FWIW I would think rerunning the ADP test would be required......but that might just be because I'm in a very cynical mood. I cannot remember ever reading about rerunning the ADP test in Rev Proc 2008-50 on EPCRS. I just ran a word search and "rerun" is not in there..... so maybe not.

Anyone else have any ideas?

[Guest Sieve]

Let's put aside for a minute that the lack of suspension of the deferral may call into question some of the regs' safe harbor rules concerning the hardship distribution (which might be an interesting issue in and of itself).

If this is an NHCE, I agree with Jim (cynical mood or not) and certainly would re-run the ADP test to make sure that a proper suspension would not have jeopardized the ADP/ACP test results.

Then, I would suspend this person's deferrals on a current basis for 6 months (assuming he/she is still employed). If not still employed, I'd return the most recent 6 months of deferrals. I don't think it's proper, following an employer/payroll error (I know, the particiapnt wasn't blameless!!), to refund deferrals for a 6-month period a few years earlier causing there to be additional taxes, penalties and itnerest to be payable by the participant. And I'd go in under VCP.

[Zoey]

Ok, let's say that the employer failed to suspend deferrals after a hardship in the current year. The participant took the hardship in February 2009. I was just notified that the employer has not suspended the employee's deferrals. What to do? I've notified the investment company that the money has to come back, but do you start the 6 month suspension now? Or now that it has been 6 months past the hardship, is the employee allowed to defer again?

Thank you in advance for your response(s).

[PensionPro]

Suspend deferrals now.

[Zoey]

Thank you. That's what I thought too.