Excess Contribution and ADP Testing

[Guest AJM 34]

I am doing 2006 Plan Year ADP Testing.

I have a participant who is over age 50 and deferred $23,282.25 in total for 2006. He is over the 402(g) limit by $3,282.25.

When I am doing the ADP test, do I use his the full deferral of $23,282.25 or only $20,000 when I calcuate this participants ADP %?

Thank you.

[401_4_ever]

Yes if he's an HCE, no if he's not.

[Tom Poje]

if I understand your data correctly, the ee is eligible for a catch up, which is 5000 in 2006.

therefore, 5000 would not be included in testing.

this would mean 18,282.25 would be used to determine his ADP %.

(I am assuming by 2006 testing you mean the plan is a calendar year)

[fiona1]

18,282.25 in they are HC and 15,000.00 if they are NHC.....I believe.

[Guest AJM 34]

Thank to all for the help.

The key point is if this participant is an HCE, which he is.

Therefore, I use 18,282.25 in the ADP testing. If he was a NHCE, I would only use 15,000

Thanks again!!!

[Guest AJM 34]

When I am doing the ADP testing for 2006, and calculating the amount of the refunds, do I deduct the amount paid for the excess contribution from the refund amount?

[BG5150]

Just curious, but where in the regs does it say to include the excess for the HCE but not the NHCE?

[Tom Poje]

First lets make sure on terms being used.

excess contributions = failed adp test

excess deferralls = deferred above the deferral limit (15,500 for 2007)

now, while an excess deferral could cause an ADP failure, it is still an excess deferral and must be treated as such for all purposes.

this makes a difference in regards to taxes.

it also makes a difference in regards to adp testing.

you first treat excess deferrals (up to the prescribed limit) as catch up.

then run your ADP test.

you do not run the ADP test first. it makes a big difference.

......

now, as to where in the regs how to handle.

hopefully you at least know to look in the 401k regs, but then where.

1.401(k)-1 certain cash or deferred arrangements

1.401(k)-2 ADP test

1.401(k)-3 safe harbor

1.401(k)-4 SIMPLE

1.401(k)-5 mergers,etc [reserved] so this section doesn't really exist yet

1.401(k)-6 definitions.

ok, hopefully looking at that you can say "I will look in 1.401(k)-2"

very good, 5 points!

this section is divided up into

(a) ADP test

(b) correction of excess contributions

© additional rules for prior year testing

well. per discussion above, we aren't talking about excess contributions, and we never mentioned prior year testing, so now we are down to section (a)

(1) in general

(2) Determination of ADP

(3) Determination of ADR

(4) Elective Contributions taken into the ADP test

(5) Elective contributions not taken into the ADP test

(6) QNECs

(7) examples

well, hopefully by this time you can see you would either want (4) or (5) - do you count excess deferrals or not.

and if you look at (4)(iii) it will provide the answer that excess deferrals of HCEs are used in the testing (unless of course they were catch-ups, but that is a different section.

hopefully the description above will make it easier or give you an idea how to try to look through the regs to find the answer you are looking for. you might not be able to find the answer, but at least it gives you an idea how things are laid out.