Are these amounts included in ACP test for the HCE

[jkharvey]

The plan made matching contributions on payroll by payroll basis. At the end of the year they had matched on compensation that exceeded $225k. I see an EPCRS correction for 401a17 that allows the plan to move the excess into suspense to be used to reduce next year's match. My question is about the ACP test for 2007. Is this excess that is due to 401a17 included in the match used to determine the ACR for the HCE?

[Guest Sieve]

First, I'd suggest that you take the conservative approach when you test, and include the excess match in the ACP test--much as you are required to include an HCE 402(g) excess in the ADP test (even though the 402(g) excess is returned to the employee). If you pass, then you're obviously ok. Of course, you probably have done that & failed ACP, or you would not have posted.

I'd anayze this as if it's just a PS contribution allocated based on too-high comp. Would 401(a)(4) be tested using the entire HCE allocation, even if it is based on compensation above the 401(a)(17) limits? I suspect not. In fact, EPCRS allows correction of a 401(a)(17) failure not simply by putting it in a suspense account, as mentioned in an earlier post, but, alternatively, by amending the plan to permit additional allocations to others of the excess HCE allocation--i.e., fix 401(a)(4). So, in the end, I don't think you'd have to include the match in the ACP test--your VCP correction would be either to put the excess in suspense, or amend the plan to allow a re-allocation of that amount to others and then test for ACP.

[fiona1]

The 2008 ERISA Outline book addresses this, to a certain extent. It states that "certain forfeited matching contributions are disregarded" from the ACP test.

It describes the forfeited match contributions to disregard as match contributions allocated on: (1) excess contributions under the ADP test, (2) excess aggregate contributions under the ACP test, (3) excess deferrals under IRC §402(g)(2)(A), or (4) for plan years beginning in 2008 or later, matching contributions that are forfeited as a result of a permissible withdrawal under an eligible automatic contribution arrangement described in IRC §414(w).

It references §411(a)(3)(G):

411(a)(3)(G) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION OR ERRONEOUS AUTOMATIC CONTRIBUTION. --A matching contribution (within the meaning of section 401(m)) shall not be treated as forfeitable merely because such contribution is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under section 401(k)(8)(B), an excess deferral under section 402(g)(2)(A), an erroneous automatic contribution under section 414(w), or an excess aggregate contribution under section 401(m)(6)(B).

I don't think it's necessary to take a conservative approach and include this match in the ACP test for a HCE. But that's just me.

[Guest Sieve]

I would agree with your conclusion, but not for your reasons. The matches you refer to have all been forfeited pursuant to rules that allow them to be forfeited--e.g., when they are attached to a deferral that fails ADP or to an automatic deferral that is returned within 90 days at the employee's request. That begs the question here, because these matches haven't been forfeited pursuant to a reg or Code provision.

My conservative approach would simply test with the match included, then there's no question if you pass (sort of like not adding back in non-key distributions before you test for top heavy)--especially since that's how the software would probably do it without a hands-on intervention.

There's another approach, of course--which I would NOT endorse. Argue that the payroll-based matching scheme caused there to be a mistake of fact with regard to when the 401(a)(17) limit was reached, and then just return the excess match to the employer. It clearly is a "playing with fire" approach, but I certainly know some clients who would want to do that before going in under VCP.

[fiona1]

Let me ask you this then - assume you take the conservative approach and include the match in the ACP. Would you do this for both HC and NHC? I know it's not likely for a NHC to be over the comp limit, but it's possible due to the fact that HC status is based on the lookback year.

And how would you handle match made in excess of the match formula? For example, say a plan matches 100% up to 3% of pay. You have an employee who made $50,000, defers $3,000, and is matched $3,000. 3% of pay is $1,500 - therefore they have been overmatched by $1,500. This match is forfeited, but would you include in on the ACP test for the same "conservative" reasons as above?

[Guest Sieve]

Good questions, fional. Remember, by the way, that I concluded in my first post that you would NOT have to include the excess match in the ACP test. Nevertheless, I will try to explain why I still would use my consevative approach first.

Yes, under EPCRS the match might be forfeited (or others' match would be raised), but any forfeiture would not be returned to the employer like in the other instances you mentioned (ADP failure, EACA return, 402(g) failure)--rather, under EPCRS the match would be lost by the specific employee but would remain in the plan to be used in a later year, or would be reallocated to others. I think the thought in those other instances is that the ACP should not take into account matches that are directly returned to the employer, since it's as if the match was never made (the employer has the money back). With an excess deferral, the funds stay in the plan--reason enought, I think, to treat it differently for testing purposes

In my conservative approach, I would, like the 402(g) excess rule, only take the excess match into account for HCEs. Reason (aside from comparability to the 402(g) rule)? Because using the excess in the NHCE ACP test would permit & even sanction manipulation by the employer ("woops! I made an inadvertent excess match to an NHCE or 2 or 3 or 10!!"), all to the advantage of the HCEs, and that manipulation might conceivably save an ACP test from failing. Do I have any authority for this approach (aside from the 402(g) excess ADP test rule)? I think so: "[The 401(m) regs] are intended to be applied by employers in a manner that does not . . . manipulate the nondiscrimination testing requirements [i.e., the ACP test] . . . so as to increase significantly the permitteed ACP for HCEs, or otherwise manipulate the nondiscrimination rules . . ." (Treas. Reg. Section 1.401(m)-1(b)(3), which has been applied by the IRS to situations other than changes to plan provisions or testing procedures.) Again, if I can pass on a conservative basis, then I will be ok and can easily support what I did. (As an example, in the days before sophisticated software and when top-heavy testing required a 5-year lookback to add back distributions, it was not unusual to ignore non-key distribution add-backs--but consider all key employee lookback add-backs--as a conservative approach to passing the test.)

Now, all that being said, if I fail using the conservative approach, then I would test as you would--i.e., exclude the match entirely. I certainly can support that approach, and would do so vigorously if necessary. But I would rather see if I can pass the "hard" way first. It's just in my conservative nature, I guess.

[fiona1]

That makes sense. Thanks for the post...