Make-Up contributions

[Guest dhall5]

A client never told the EEs they could defer on their bonus pay, and thus had to contribute make-up contributions on these bonuses for the 2002 - 2004 PYs. This contirbution was made in 2007.

Now they are failing the 2005 ADP (they are passing ACP); they use prior year testing method. The test WOULD pass if they used current year testing, but obviously we didn't amend the plan in time to change the testing method.

Anyone eligible for the catch-up contribution has been taken into account. Because of the prior year testing, we cannot allocate QNECs.

My thought was that we should go ahead with the refunds (most are about $250), and have the client pay the 10% excise tax because it's WELL PAST the 2 1/2 month correction period.

Any thoughts?

[J Simmons]

The 10% penalty may be the least of your concerns.

You only have until the end of the next year to correct ADP testing falure for a plan year in order to avoid plan disqualification by reason of the ADP failure. If the 2005 ADP failure was not corrected by the end of 2006, you have a serious plan qualification issue and need to involve the IRS in the correction.

[austin3515]

Agreed that your correction is passed due and you have qualifcation issue, but you don't need to involve the IRS. Check out the IRS's EPCRS correction program. You can definitely self correct this using the "one-to-one" correction method (assuming the other eligibility requirements are met). Basically what this says is that if your have refunds of $5,000 in total that you would contribute a QNEC to the employees of $5,000 as a "penalty" for not correcting it in time.

I'm saying you can self correct, because under EPCRS, you have until the last day of the second plan year following the date on which the corrective distributions were required (Section 9.02), which gives you until 12/31/2008 to self-correct a failed test from 2005 EVEN IF THE FAILURE IS SIGNIFICANT.

Here is a link to the IRS program:

http://www.irs.gov/pub/irs-drop/rp-06-27.pdf