ADP failure for 2006

[fiona1]

1/1 plan anniversary. ADP test for 1/1/06 to 12/31/06 failed. A correction needed to be made by 12/31/07.

There were 3 HCE's who were due a refund of $1500 each. They all terminated employment on 11/8/07 and rolled their money out of the plan into another financial institution. The rollover occcurred in November of 2007.

Now, I know that the $4,500 was not eligible to be rolled over. However, the plan sponsor did not notify the former employee's to tell him this.

So here are my questions....

What should the plan sponsor do at this point? Is this considered an operational failure? Do they need to self-correct using the EPCRS? Or, because the money left the plan prior to 12/31/07, is that considered a correction within the 12 month correction period? Or does their lack of informing the former employee's come into play?

The plan sponsor really doesn't want to use the One-to-One method and have to fund a $4,500 QNEC.

Thoughts?

[Guest SWH]

Would the monies have been distributed to correct the failure by the deadline in the first place?

[fiona1]

Probably not.

[Guest SWH]

Their lack of informing former employees definitley comes into play, in my opinion. If they have no documentation that they tried to get the corrections done within the prescribed timelines and were hampered because the monies had already been rolled over, then I think that you're stuck.

[buckaroo]

I am not sure about the timing of the distributions. My recollection is that if a ptp rolls out prior to the end of the plan year in question, then they have to move the money out of the IRA/plan. I do not know if the rules would be different if the roll occurs after the end of the year.

Either way, if you think that there has been a violation, be careful about the 1-to-1 QNEC if the testing was disaggregated. My recollection is that the QNEC must be calc'd based on any refund amounts when the test is run aggregated (Over 21/1 and Under 21/1 together).

[Leopurrd]

it is my understanding that the plan itself is in compliance because the refunds were distributed in the 12 month period. It's the participant that is in violation because they rolled over a distribution that was not eligible to be rolled.

Write a letter stating that the participant needs to have the ineligible monies moved from their IRA account immediately, and send them a revised 1099R splitting out the rollover (G) and taxable portion/refund (8 or P depending on 1099 year).

The plan doesn't need to do the one to one/qnec at all.