ACP Refunds vs. Match Forfeitures

[zimbo]

Would be interested in opinions regarding the correct "ordering" for a plan that fails an ADP Test which then results in the need to forfeit some matching contributions to the HCEs who get refunds of deferrals due to the failed test. The real question is how to properly run the ACP test in that instance.

It seems that some folks believe that you run the ACP Test without netting out any forfeited match and if it fails and if the refunds due to the failure exceed the amount of match to be forfeited due to the ADP Test refunds, then you are done. I believe that, as per the 401k regs, you must run the ACP Test net of the forfeited match and then, if it fails, make your refunds as necessary. The difference is in the amount of match that the HCE will ultimately receive either in the plan or as a taxable refund.

I also believe that if the match has not yet been made at the time the ADP test is run, you must calculate the employer match based on the deferrals NET of any refund required due to a failed ADP Test.

Do others agree with this procedure?

[Tom Poje]

If you have a failed ADP test and distribute deferrals, then you might have to forfeit match because te benefits rights and features rule clearly state you can't do that. 1.401(a)(4)-4(e)(3)(iii)(G). but those same rules also state that to determine if you have a violation, that the rate of match is determined AFTER corrections made under 1.401(m)-2(b)(1)(i) [which are excess aggregate contributions]

we read further that (in fact the very first sentence of 1.401(m)-2(b)(3)(v)(B)

Excess aggregate contributions are NOT considered when determining rate of match an individual received.

so, based on that, I am indeed one of the folks that believes you can run the ACP test, correct a failed ACP test (as well as the ADP test) and then determine if you have to forfeit match due to a bad rate of match. in fact, I'd say the regs say you have to do that way.

hope that helps.

[zimbo]

If you have a failed ADP test and distribute deferrals, then you might have to forfeit match because te benefits rights and features rule clearly state you can't do that. 1.401(a)(4)-4(e)(3)(iii)(G). but those same rules also state that to determine if you have a violation, that the rate of match is determined AFTER corrections made under 1.401(m)-2(b)(1)(i) [which are excess aggregate contributions]

we read further that (in fact the very first sentence of 1.401(m)-2(b)(3)(v)(B)

Excess aggregate contributions are NOT considered when determining rate of match an individual received.

so, based on that, I am indeed one of the folks that believes you can run the ACP test, correct a failed ACP test (as well as the ADP test) and then determine if you have to forfeit match due to a bad rate of match. in fact, I'd say the regs say you have to do that way.

hope that helps.

Thanks for your input. I still stand by my theory that you must first forfeit the impermissible match (due to a failed ADP TEST refund), then do your ACP using the "correct" match. My basis is 1.401(m)-2(a)(5)(i) which tells us not to include matching contributions that do not meet 401(a)(4) in the ADP Test.

Perhaps there is more than one way to skin this cat?

[Tom Poje]

"1.401(m)-2(a)(5)(i) which tells us not to include matching contributions that do not meet 401(a)(4) in the ADP Test."

my copy of the regs says

1.401(m)-2(a)(5)(i) which tells us not to include matching contributions that do not staisfy the requirements of paragraph (a)(4)(iii) of this section in the ACP Test.

and that section says match is counted only if

(A) allocated to the employee's account under the terms of the plan

my comment "Duh, if you didn't folow the terms of the document, then why include it"

(B) made on the basis of deferrals or employee (after tax) contributions

my comment "Hence the term 'match'

© actually paid to the trust no later than the end of the 12 month period following the year that contains that date.

my comment, in other words if match was required, and you made it really late - over a year after the plan year end, then you must test it, not as a match, but as a nonelective under 401(a)(4) - which is what 1.401(m)-2(a)(5)(i) says.

[zimbo]

"1.401(m)-2(a)(5)(i) which tells us not to include matching contributions that do not meet 401(a)(4) in the ADP Test."

my copy of the regs says

1.401(m)-2(a)(5)(i) which tells us not to include matching contributions that do not staisfy the requirements of paragraph (a)(4)(iii) of this section in the ACP Test.

and that section says match is counted only if

(A) allocated to the employee's account under the terms of the plan

my comment "Duh, if you didn't folow the terms of the document, then why include it"

(B) made on the basis of deferrals or employee (after tax) contributions

my comment "Hence the term 'match'

© actually paid to the trust no later than the end of the 12 month period following the year that contains that date.

my comment, in other words if match was required, and you made it really late - over a year after the plan year end, then you must test it, not as a match, but as a nonelective under 401(a)(4) - which is what 1.401(m)-2(a)(5)(i) says.

I see your point in that the 401(a)(4) mentioned in that section only pertains if the matches don't meet the requirements of (a)(4)(iii). But, continue on in that reg section. Go to 1.401(m)-2(a)(5)(v). Doesn't that seems to say that matches that are fofeited are not taken into account in the ACP Test?

[Tom Poje]

yes, matches that are forfeited are not taken into account for the ACP test. would agree with you there. but that is all it says.

the issue is

are those matches forfeitures because they are related to excess contributions or are they excess aggregate contributions to start with and therefore don't pertain this question.

so it boils down to which comes first the chicken or the egg, or rather, are you required to run the ADP test before performing the ACP test?

I'd hold it is more or less at the same time, not one before the other.

so for example I run my tests and ADP has an excess contribution of $1000

and ACP has an excess aggregate contribution of $500.

the match was $ for $, so the related match is $1000. but wait, this was determined before any corrections were made. but that is not what the regs said. the regs said I determine if I have a rate violation AFTER corrections are made.

or at least that is how I see it.