Timing of ADP Correction

[bdeancpa]

We have a 401(k) plan which failed the ADP test. The trustee sent a letter to the custodian instructing them to make corrective distribuitons prior to the 2 1/2 month deadline for making corrective distributions without incurring an excise tax. The custodian (a mutual fund company) did not make the distribuitons by March 15, but says they will do it now and treat it as if it was done on March 10 (based on March 10 share balance and value, checks dated March 10).

One of the participants (not an owner) is aware that if he received the distribution after the 2 1/2 month deadline he would not have to amend his 2007 return which has already been filed. This participant called the fund company after March 15 and is aware the checks had not yet been cut as of that date.

Our client, the plan sponsor, is now in a dispute with the mutual fund company about whether or not they can treat the corrective distribution as occuring on March 10 if they cut the checks now. Especially becasue a participant who does not want to amend their return knows they were not cut by March 15, even if they show up dated March 10. The Fund company does not want to treat the distribution as made after March 15 because they know the sponsor will look to them to reimburse them for the excise tax since they received instructions to make these distribuitons well in advance of March 15.

Has anyone ever heard of any allowable reason to cut a check after the 15th and treat it as made before the 15th, just becuase you were using share values and amounts as of some date prior to the 15th. If this were allowable it seems we could make corrective distributions as of December 1 and treat them as made on March 15.

Any opinions would be appreciated.

[Bill Presson]

We have a 401(k) plan which failed the ADP test. The trustee sent a letter to the custodian instructing them to make corrective distribuitons prior to the 2 1/2 month deadline for making corrective distributions without incurring an excise tax. The custodian (a mutual fund company) did not make the distribuitons by March 15, but says they will do it now and treat it as if it was done on March 10 (based on March 10 share balance and value, checks dated March 10).

One of the participants (not an owner) is aware that if he received the distribution after the 2 1/2 month deadline he would not have to amend his 2007 return which has already been filed. This participant called the fund company after March 15 and is aware the checks had not yet been cut as of that date.

Our client, the plan sponsor, is now in a dispute with the mutual fund company about whether or not they can treat the corrective distribution as occuring on March 10 if they cut the checks now. Especially becasue a participant who does not want to amend their return knows they were not cut by March 15, even if they show up dated March 10. The Fund company does not want to treat the distribution as made after March 15 because they know the sponsor will look to them to reimburse them for the excise tax since they received instructions to make these distribuitons well in advance of March 15.

Has anyone ever heard of any allowable reason to cut a check after the 15th and treat it as made before the 15th, just becuase you were using share values and amounts as of some date prior to the 15th. If this were allowable it seems we could make corrective distributions as of December 1 and treat them as made on March 15.

Any opinions would be appreciated.

In my opinion, the check date is the date the check is written. I would side with the participant. But that's just me.

They could always call the IRS and see what they think.