excess match and acp correction

[Lori H]

A 401K miscalculated its match and ultimately deposited too much match into some participants accounts. In addition the ACP test failed and and match refunds were do. The financial company issued checks to the participants, however we were under the impression the funds should be transferred to the holding/forfeiture account or at the very least returned to the company, not the participants.

[austin3515]

Match to which the participant was never entitled to do should have been forfeited.

[Tom Poje]

I can not tell from your description if you have 1 or 2 issues you are asking about.

certainly if match was calculated incorrectly those $ are probably best held in suspense to reduce future contributions.

or at least that is the way the self corrections under EPCRS seem to read in most cases.

now, if you have a second issue as how to handle

excess aggregate contributions (failed ACP test) then let 1.401(m)-2(b)(2)(vi) be your guide

the only time these would be forfeited would be if the particpant was not 100% vested.

[Lori H]

Needing to revisit this again:

If a participant is 100% vested and they received an excess match contribution due to the employer miscalculating(for example they did not take the comp limit into account), does that excess get forfeited or distributed to the participant?

Now if the plan fails the ACP test AND the participant is 100% vested, the employee gets the refund. It is not forfeited?

If the participant is NOT 100% vested the portion of the match that fails the ACP test does get forfeited?

[Tom Poje]

if the particpant receives a match they are not entitled to (e.g. comp wasn't limited) that match would be forfeited.

if you fail ACP test, then you have an excess aggregate match, and that is distributed to the participant.

if the person is not 100% vested, then you can either:

1. distribute the vested protion and forfeit the unvested portion or

2. distribute the amount and then you would need to track the vested portion portion properly.

e.g. if after the distribution the person had $1000 balance and was 60% vested, the vested balance would be less than $600 becuase the person, for lack of a better term, received some unvested $. This is a good deal for the person, because as they continue to vest eventually the unvested protion disappears.

if the match is a 'related match' due to a distribution of deferrals, then it is forfeited, but there is nothing to stop you from fixing the ACP test before the ADP test, and thus the match might not be forfeited.

[Lori H]

this rule (excess aggregate match distributed to the participant) makes absolutely no sense. If a plan is to be Non Discriminatory, the HCE should not receive the benefit of the match. If you tested the plan a couple of months prior to the close of the plan year, you could make adjustments (i.e. reducing the HCE match) in order to pass the ACP, then the HCE would not have the benefit of receiving an excess match distribution :angry: can someone please explain the reasoning behind why the HCE would ultimately receive match they otherwise would not be entitled to rather than the company having the benefit of using them to offset future cost as a forfeiture?????

[K2retire]

Trying to make sense of IRS rules will make you crazy. Just memorize them and move on.

[fiona1]

Here is the way I've always had it explained to me......

When a participant receives a match that they shouldn't have - an operational failure has occurred. Examples include the plan sponsor not following the match formula - or not factoring the compensation limit.

The correction for these operational failures involve the forfeiture of the excess match.

Failing an ACP test is NOT an operational failure. It is a nondiscrimination failure. As a result, the HCE's must remove the money from the plan - but the IRS allows those funds to be refunded instead of forfeited. They still lose out on keeping that money in the plan - and they are taxed on it (10%).

Heck - maybe that's it - more taxes for Uncle Sam.

[BG5150]

Failing an ACP test is NOT an operational failure. It is a nondiscrimination failure. As a result, the HCE's must remove the money from the plan - but the IRS allows those funds to be refunded instead of forfeited. They still lose out on keeping that money in the plan - and they are taxed on it (10%).

The refund is taxed at the person's ordinary income rate. However, many record-keepers withhold 10% in federal taxes (and sometimes state, too), unless the participant elects another percentage, including zero.

[fiona1]

Failing an ACP test is NOT an operational failure. It is a nondiscrimination failure. As a result, the HCE's must remove the money from the plan - but the IRS allows those funds to be refunded instead of forfeited. They still lose out on keeping that money in the plan - and they are taxed on it (10%).

The refund is taxed at the person's ordinary income rate. However, many record-keepers withhold 10% in federal taxes (and sometimes state, too), unless the participant elects another percentage, including zero.

The 10% withholding is mandatory - unless the participant opts out of it by filing a W-4P. But I understand what you're saying about it being taxed at the person's ordinary income rate.

[TPApril]

Looking at process - if there is an excess match deposited in error that has not yet been removed by 12/31, is the ACP test run including that amount, or it is assumed it will be forfeited appropriately since it wasn't correct to begin with and the ACP test is run with the correct match?

[BG5150]

I would just take it out.

[Tom Poje]

otherwise I would intentionally give all NHCEs a huge match they shouldn't get, use it in the test to help pass ACP then forfeit it after plan year end because they shouldn't get it in the first place. clever scheme!

[TPApril]

you make a good point Tom. I guess I shoulda clarified that it is an HCE in question. I will just test without it.