Cross Testing & Failing ADP Test & Otherwise Excludable

[Guest SuzieQNEC]

In 2007, HCE defers $15,000.

ADP Test fails.

$5,000 is recharacterized as catchup.

$1,000 is returned (incidentally after 3/15/08 but before 12/31/08)

In determining the HCE's maximum ER contribution while applying the cross testing formula, would $9,000 be the correct amount to use, which would exclude both catchup and the corrective distribution?

Another question - if the cross testing is using Otherwise Excludable for the NHCE's who can defer immediately but are not yet eligible for ER, does that mean they would also be excluded from the standard ADP test?

[Tom Poje]

the way I understand things would be as follows:

whatever method you use for coverage you must use for nondiscrim

you have 3 basic coverage tests in a 401k plan

401k corresponding nondiscrim test ADP

401m corresponding nondiscrim test ACP

nonelective: correponding nondiscrim test: test on allocation basis or cross test

each of these 'tests' are independent of the other tests. thus, you could split your 401k coverage into 2 tests - statutory includables and otherwise excludables, and thus you would run your ADP test in a similar fashion.

now you proceed to your ACP test. again you could split the test, but you dont have to

now you proceed to the nonelective test. again whatever you do for coverage you do for nondiscrim.

but as far as I can make things out from the regs, there is no requirement that each of the separate tests have to be done in the same fashion as the other test.

............

catch ups are not included in nondiscrim testing, but corrective distributions are included. catch ups are not including in determining how much a top heavy minimum would be required for a given year but corrective distributions would be.

catch ups are not included when determining if a person exceeded the 415 limit, but corrective distributions are.

[BG5150]

In 2007, HCE defers $15,000.

ADP Test fails.

$5,000 is recharacterized as catchup.

$1,000 is returned (incidentally after 3/15/08 but before 12/31/08)

In determining the HCE's maximum ER contribution while applying the cross testing formula, would $9,000 be the correct amount to use, which would exclude both catchup and the corrective distribution?

Another question - if the cross testing is using Otherwise Excludable for the NHCE's who can defer immediately but are not yet eligible for ER, does that mean they would also be excluded from the standard ADP test?

My vote is $10,000. You do not reduce the annual additions by the refund amount.

[dmb]

In 2007, HCE defers $15,000.

ADP Test fails.

$5,000 is recharacterized as catchup.

$1,000 is returned (incidentally after 3/15/08 but before 12/31/08)

In determining the HCE's maximum ER contribution while applying the cross testing formula, would $9,000 be the correct amount to use, which would exclude both catchup and the corrective distribution?

Another question - if the cross testing is using Otherwise Excludable for the NHCE's who can defer immediately but are not yet eligible for ER, does that mean they would also be excluded from the standard ADP test?

My vote is $10,000. You do not reduce the annual additions by the refund amount.

I have a similar situation, but without catch up. 401k fails ADP, HCE receives refund of excess contribution. On the New Comparability employer side can the amount of the returned salary deferral be incorporated in the New Comp allocation if the HCE goal is to receive the 415 max contribution. For example in 2008, HCE defers $15,500, but due to failed ADP $5,000 is returned. For New Comp allocation can he receive $35,500 or is he limited to $30,500 (based on original deferral). New Comp allocation subject to passing non-discrim testing of course. Thanks.

[austin3515]

Amounts refunded due to a failed ADP test are still counted as annual additions. So beause he already did $15,500 of 401k, he "only" gets $30,500 of PS.

[dmb]

Amounts refunded due to a failed ADP test are still counted as annual additions. So beause he already did $15,500 of 401k, he "only" gets $30,500 of PS.

Thank you.

[Tom Poje]

this is one of those things I classify as falling into the category of outright "strange".

under EPCRS Appendix A, failure of 415 ....even if the error did not result from the allocation of forfeitures or from reasonable error in estimating compensation...(go to last sentence...) for limitation years begining after 1/1/09...corrected in accordance with section 6.06(2) and 6.06(3)

which says you distribute unrelated deferrals first (then deferrals and forfeit unrelated match)

such deferrals are disregarded for 402(g), 415 and ADP test [and related match from ACP test]

I believe at one of the ASPPA Conferences the IRS even indicated this could indeed happen. (That surprised me, but going back and reading the stuff, it does seem to say that)

for instance, suppose I alloacte a 20% to a group in a new comp plan. becasue of deferrals, one ee eould go over the 415 limit. I follow the formula and 'over-allocate' to the individual, and then make the correction for 415 violation.

Ultimately you end up with the person receiving the same amount in total, but in different sources.

yeh. ,mentally it sounds somewhat flaky to me, but I haven't found anything against doing that.