Failed ADP Test Really Passes

[goldtpa]

Client's current TPA claims that the 2006 ADP test failed. They returned money to the HCEs. In review of the test, it appears that some of the NHCEs over 50 had part of their contributions randomly classified as a catch up. In one case the NHCE had a $5,000 deferral with $2,000 of the 5,000 classified as a catch up. The TPA did not use the entire 5,000 in the ADP test, only 3,000 was used for testing.

If after re-doing the test the proper way the plan passes, is it the trustees duty to recover the ADP distributions plus interest? Would the interest calculation be the same as if the contributions were late? What about the taxes the HCE had to pay on the money?

Thanks

[401_4_ever]

I'd treat it is a plan overpayment outlined in EPCRS. Yes, they should make reasonable efforts to recover the overpayment. I don't think EPCRS requires an earnings calc but I haven't done one of these in a while so I'm not positive on that.

Most trust companies & recordkeepers can recover withholding if it doesn't cross tax years -- so since this is a 2006 ADP test, I'm assuming the tax was withheld in 2007. That shouldn't be a problem -- and the 1099 isn't issued until January of 2008 so that also shouldn't be an issue.

Even if you can't recover the withholding, this can be reflected by amending the participant's tax return, if they included it on their 2006 return.

[goldtpa]

Thanks for the info.