ADP Refunds

[Jilliandiz]

Client failed their ADP test for 2006. I will refund the necessary HCE's and give them 1099's, but when do they need to be completed by? I thought it was 3 months after the plan year ended. Also, what year do I issued the 1099 for, if I'm correcting the 2006 ADP test, but refunding them in 2007?

Thanks

[fiona1]

You actually have 12 months after the plan year end to correct a failed ADP/ACP test. So, assuming the 1/1/06 to 12/31/06 ADP test failed, you have until 12/31/07 to issue the refunds.

Now, assuming the gross amount of the refunds are $100 or more, then..

...if refunded by 3/15/07 then they are taxable in 2006.

...if refunded after 3/15/07 then they are taxable in 2007 and the plan sponsor incurs a 10% excise tax.

Most plan sponsors will issue the refunds within 2 1/2 months to avoid the 10% excise tax. Keep in mind that the 10% excise tax is imposed on the plan sponsor and NOT the participant and only required if the refunds are not distributed within 2 1/2 months (3/15/07 in this case).

[Tom Poje]

If I recall the 1099 gets real strange. the individual has to claim the distribution on his taxes, but wont get a 1099 until 2008 (the 2007 1099R with a code P)

[pmacduff]

That's right Tom and (thankfully) the PPA has changed this so that ADP correction refunds for the plan year 2008 (done in 2009) will be taxable in the year distributed. So we only have to do things the old way for 2006 and 2007.

I think this is such a welcome change, our clients get confused enough about their Plans; I hated having to explain the taxation and 1099-R issue to them every year !!