Failed testing

[Guest LSULLIVAN]

A 401k plan fails testing and two owners take a corrective distribution.

The TPA has instructed these two owners they must re-distribute these corrective distributions amongst all other employees.

How is it that the owners take salary deferral and give these monies to eveyone else as an employer contribution?

[Tom Poje]

more info is needed.

if its an ADP test failure only, corrective distribution is returned to the owners

if its an ACP test failure only, corrective distribution is returned to the owners (in the odd case of them being 0 vested, then the distribution would be forfeited.if partially vested then it depends on how you want to handle things)

if it is an adp failure only AND there is 'related' match, then the match is the only thing that is forfeited.

if it is an ADP and ACP failure then figure the distributions first, then worry about related match that might need to be forfeited.

[401_4_ever]

If they didn't do the distribution within 1 year of the plan year end, they owe a 1 to 1 QNEC, which means for every dollar that comes out of the plan, they owe a qnec of the same amount to the plan. Next time they should sign off on test results and make the distribution on time, and they would have avoided the situation (and the 10% penalty).

[Guest BXO]

Tom -

if partially vested then it depends on how you want to handle things)

Could you explain the options for this? I assumed you had to forfeit the unvested portion and had to distribute the vested portion.

Thanks.

[Guest LSULLIVAN]

more info is needed.

if its an ADP test failure only, corrective distribution is returned to the owners

if its an ACP test failure only, corrective distribution is returned to the owners (in the odd case of them being 0 vested, then the distribution would be forfeited.if partially vested then it depends on how you want to handle things)

if it is an adp failure only AND there is 'related' match, then the match is the only thing that is forfeited.

if it is an ADP and ACP failure then figure the distributions first, then worry about related match that might need to be forfeited.

Not sure which test or if both failed but I do know there is a match and the corrective distribution comprised of salary deferral only. There wasnt any match returned or forfeited. Why wouldnt there be?

If the corrective distribution was taken, then why would they still have to make an additional employer contribution? Why wouldnt there be any match returned or forfeited?

The TPA is saying to take this salary deferral that was returned and send it back in as an employer contribution. If I was one of the owners and I received part of my income back and have to pay my taxes on it, why would I take my money and give it to my employees? The very least, wouldnt I take my money and then use company or employer monies to makes these employer contributions?

Maybe I think this is simple but actually is not.

I thought the choices would be:

1) The owners take a corrective distribution of their salary deferral and return the match

OR

2) Not take the corrective distribution but make a non-elective employer contribution to the employees.

[Tom Poje]

so many questions1

ok, if the plan in question failed 2 years ago, then that is the scenario in which you would have to make a 1-1 correction.

I am assuming you are only talking about last year plan failure.

Unless I am missing something in the discussion, it makes no sense to 'return deferrals and make them employer contributions'

lets suppose the plan provides a 100% match for each $ deferred, and the correction was to return $100 in deferral. in that case $100 in match should be forfeited as it 'relates' to the deferral.

however, if the match was 100% but capped at 5% of deferrals, and the refund of $100 deferrals was on deferrals greater than 5% then there would be no related match forfeiture.

something is missing from the facts, because a corrective distribution was made, and now all of a sudden it is being asked to be returned and given to others, but no reason is given why.

..............

as for BXO question on match distribution/forfeiture.

suppose an ee has $1000 in match balance. ACP test failed. ee is 50% vested, and $200 needs to be returned.

there are 2 possibilities.

distribute $100 and forfeit $100 because he is 50% vested.

the other possibility I've seen written up is to

distrubute the $200.

this leaves the ee with a balance of $800.

he is 50% vested, but his vested balance is not $400, but rather $300 because he has received an additional $100 already. This turns out to be a good deal provided he keeps works and becomes 100% vested.

[austin3515]

IT;s not like a TPA to say such a thing. I bet 10 to 1 that the ADP test in question is the calendar 2005 test.

If refudns were not made by 12/31/06, then as a condition of not being disqualifed, a special contribution is made to the employees in an amount that is equal to the late refunds. Sort of a "penalty" for missing the distribution deadline.

[Guest LSULLIVAN]

IT;s not like a TPA to say such a thing. I bet 10 to 1 that the ADP test in question is the calendar 2005 test.

If refudns were not made by 12/31/06, then as a condition of not being disqualifed, a special contribution is made to the employees in an amount that is equal to the late refunds. Sort of a "penalty" for missing the distribution deadline.

After finally receiving the testing results and the qnec allocation, it was indeed for a prior year. So now this makes sense. The only thing that doesnt make sense is that the TPA told them to take the corrective distributions and re-allocate instead of sending in employer monies.

Thanks for everyone's input. I LOVE THIS WEBSITE!!!!!!!!

[Tom Poje]

now comes the fun part:

allocating the QNEC.

there are actually 4 possibilities that are permitted just to confuse you entirely

Eligible NHCEs in year of failure

Eligible NHCEs in year of failure and are also NHCEs in year of correction

Eligible NHCEs in year of failure and are still employees on a date during the year of correction

Eligible NHCEs in year of failure and are also NHCEs in year of correction and are still employees on date during the year of correction

[austin3515]

LSULLIVAN -

The HCE's should have received a check personally - it is their personal money. The BUSINESS should be depositing the funds.

[Guest LSULLIVAN]

Here's another thought.

If they failed both ADP and ACP and were over 50 years old, couldnt they recharacterize contributions as a catch up? Depending on the amount, couldnt this be a way of not having to take a distribution for either test or both?

[austin3515]

Yes for the ADP test - only 401k contributions can be recharacterized as catch-ups.

[imchipbrown]

I have an HCE and NHCE. Using prior year testing, for 2013 the HCE will be able to defer 7% of pay (NHCE % in 2012 plus 2%) plus $5,500 catch-up. Can I suggest that the HCE can defer more if (as employer) he's willing to contribute QNEC money for the NHCE? In other words, fail the ADP test by some amount you're willing to kick back in as QNEC? Does the QNEC even work with prior year testing, or is a switch to current year required?

[PensionPro]

When using prior year testing QNECs must be allocated to an NHCEs account for 2012 and paid to to the trust by 12/31/13 in order to be considered in the 2013 test.