ADP failure to 415 failure

[Sully]

Plan year end 12/31/06.

ADP test failed and a refund of $1,500 is required for the only HCE in the plan. There are a number NHCE’s in the plan.

The HCE is under age 50 and he contributed $15,000 for the year.

The desire is to get the HCE to a total allocation of $44,000 after any refunds.

The thought is that this could this be accomplished by making a cross-tested profit sharing contribution of $30,500 for the HCE. This would put his total contributions at $45,500 (15,000 + 30,500), which would create a 415 excess of $1,500. The plan says to correct a 415 excess by refunding employee 401(k) contributions. So, the $1,500 gets refunded as a 415 excess, which is excluded from the ADP testing. The ADP test now passes and the total contribution to the employee ends up being $44,000 (after the $1,500 refund). We have in essence changed the excess from an ADP failure to a 415 failure.

Anybody agree, or disagree, with this thought pattern?

TIA

[Tom Poje]

based on sitting in on a discussion with IRS this would be frowned upon.

I believe the argument being the 'reasonabless' of the error. when the additional contribution is fixed (e.g. in the 'old' days when you had to combine DB and DC plans for 415 limits or possibly had a money purchase or target benefit, this might occur). but given the fact you said its cross tested I'fd be a bit cautious about following such a strategy.

[rcline46]

I would post the PSP and let the document handle the 415 error. I don't care if the IRS 'frowns' on it, although you do need to be aware of it. There ain't notin in official writin on it.

[Just Me]

Just my 2 cents, but it doesn't pass the "smell" test to intentionally overcontribute to a plan for the purpose of creating a 415 excess and therefore allowing additional deferrals to be made by HCEs. Anybody else bothered by this?

[Bird]

It doesn't bother me. If he had simply not contributed $15,000 he could have received the extra PS contribution; it's not like he's getting something extra that was not otherwise attainable.