Excluded Employee Makes Salary Deferrals

[Dougsbpc]

We administer a 401(k) plan that excludes certain HCE's from participation. The plan has S/R and P/S only.

We just received the 2007 data and found one of the excluded HCE's made salary deferrals. Our document indicates that salary deferrals and earnings be distributed to the ineligible participant.

I have read all the discussions about this.

Rev Proc 2006-27 provides correction by amendment and DL. However, it appears to only permit this if the employee has not met age/service requirements or met age/service and entered before the entry date. It does not appear to apply to an excluded class, particularly if that excluded class is comprised of HCEs. In fact, it starts out by saying "The operational failure of including an otherwise eligible employee in the plan who doesnt meet age/service or enters early"

This seems to not apply to excluded employees as they are not otherwise eligible.

Given this we are inclined to follow the terms of the document and distribute the salary deferrals and earnings. Should these salary deferrals be included in the ADP test?

[J Simmons]

I would exclude from the ADP test those salary deferrals returned to the INELIGIBLE HCE. Treas Reg sec 1.401(k)-2 speaks only in terms of how to determine the ADR (for ADP purposes) of eligible employees.