ADP refunds terminated HCE's

[Guest EricWings]

Details:

- Prelim ADP testing is failing for a 1/31 plan year end.

- HCE that is terminated is going to get a refund.

- HCE is rolling over entire account to an IRA.

- HCE is demanding distribution immediately.

- Corbel Prototype Document

The three options we see in no order:

Option #1 - Hold the distribution until after the ADP test is complete and refunds are paid.

Option #2 - Pay out a percentage of the account and the remainder after the refund is paid.

Option #3 - Pay out the entire distribution and try to get the money back or reclassified by the receiving IRA.

I'm wondering if I have missed any options and how others are handling similar situations.

[Guest LauraVanSteeter]

You may run into other issues if you hold the distribution. Check your plan document.

Pay it out.

If the plan fails ADP and the terminated, paid out HCE has an excess, then re-issue the 1099R.

The former participant can provide this to the IRA custodian to either reclassify part of the rollover as an annual contribution or remove it from the account.

[rcline46]

The document probably is checked off to pay as soon as administratively feasible. I would take the position that for an HCE, it is not administratively feasible to pay until the adp test is done.

[ak2ary]

So HCE 1 terminates employment in January and requests a distribution. Standard practice for the plan is to distribute within a couple weeks of the request. But for this HCE, we're not payin til we have the ADP test done whch may be in July, October, December, next year all at the discretion of the plan sponsor. I think thats a 411(d)(6) violation. Process the request in the normal course of business and adjust the 1099 later, if necessary. If you believe it may be a couple weeks delay, the plan sponsor can ask the participant if he wants to hold up until the tax ramifications are clearer, but you can't take away the participants rights.

[Tom Poje]

well you just never know what rules are buried deep within the recesses of the regulations.

there may be an out! accidently tripped across this one.

According to the regulations, a corrective distribution must be made as soon as administratively feasible after the date of termination of the plan, but in no event later than 12 months after the date of termination. If the entire account balance of an HCE is distributed prior to when the plan makes a distribution of excess contributions, the distribution is ‘deemed’ to have been a corrective distribution of excess contributions to the extent such a corrections would have been required! [Treas. Reg. §1.401(k)-2(b)(2)(v)] similar rule applies to a match §1.401(m)-2(b)(2)(v)]

[richard]

Tom,

If I understand your January 9 post, is the following a correct application to the following situation.

ADP test is failed for 2007. 6 HCEs will receive refunds by March 15. However, 1 HCE (whose refund would be $3,000 including interest) terminated employment in mid-2007 and rolled his entire account balance to his own IRA in late 2007.

Since the $3,000 cannot be taken out of his 401(k) account and refunded to him now, that $3,000 is considered as a refund and is taxable to him for 2007. Is this correct?

If this is correct, what happens to the $3,000 that is now sitting in his IRA?

Richard

[Kimberly S]

The IRA custodian should be notified that it was not eligible for rollover.

[Guest Mike Schwing]

Not that this is the same but I was reviewing posts and came across this one - my plan has a slightly different twist - What if the HCE who failed testing is still employed; however, he took a hardship distribution in such a large amount in 2007 that his remaining balance in the plan is not large enough to cover the amount of his ADP refund plus earnings. Can I reclassify a portion of his hardship as an excess contribution and issue revised 1099's? Or do I have to pay out his remaining balance also? Not sure what to do!!!!

[Lou S.]

Not that this is the same but I was reviewing posts and came across this one - my plan has a slightly different twist - What if the HCE who failed testing is still employed; however, he took a hardship distribution in such a large amount in 2007 that his remaining balance in the plan is not large enough to cover the amount of his ADP refund plus earnings. Can I reclassify a portion of his hardship as an excess contribution and issue revised 1099's? Or do I have to pay out his remaining balance also? Not sure what to do!!!!

Not sure if it is correct but any time an HCE took a taxable distribution (unless it was a required 401(a)(9) minimum) we reclassify part of the distribution as the refund and isses amended 1099-Rs. That way he/she escapes the 10% penalty if they are under 59 1/2.

[Guest Mike Schwing]

That is what we have always done with terminated HCE's who took full distribution - and we wer leaning on doing the same thing for the hardship - but I had never seen it with the hardship so I was inquiring to see it there was correct way or even a standard way. Thanks for the reply.

[Guest deathbycashcall]

All of this is covered in Sal's Book, Chapter 11, even the hardship stuff.