ADP refunds after full balance already distributed

[jkharvey]

How do you handle this in operation. The plan terminates in December and pays out balances ASAP. The ADP test is run after all this and plan fails so distributions are required. Well, distributions have already been made and 1099R issued. Seems to me the 1099R has to reflect that a portion of that distribuiton is not eligible for rollover because ADP test failed? This makes for very unhappy HCEs. Suggestions? What am I missing?

[PensionPro]

File/issue amended 1099-Rs and inform IRA custodian of ineligible rollover amount as applicable.

§1.401(k)-2(b)(2) (v) Distribution. Within 12 months after the close of the plan year in which the excess contribution arose, the plan must distribute to each HCE the excess contributions apportioned to such HCE under paragraph (b)(2)(iii) of this section and the allocable income. Except as otherwise provided in this paragraph (b)(2)(v) and paragraph (b)(4)(i) of this section, a distribution of excess contributions must be in addition to any other distributions made during the year and must be designated as a corrective distribution by the employer. In the event of a complete termination of the plan during the plan year in which an excess contribution arose, the corrective distribution must be made as soon as administratively feasible after the date of termination of the plan, but in no event later than 12 months after the date of termination. If the entire account balance of an HCE is distributed prior to when the plan makes a distribution of excess contributions in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contributions (and income) to the extent that a corrective distribution would otherwise have been required.

[jkharvey]

Thank you. I knew there was only one answer..lol How do you handle it with the HCEs as they take the distributions? Do you inform them up front that a part of this might have to be reclassified and they could expect a revised 1099R? I guess I'm looking for a way to "soften" the blow, but I just don't think such a thing exists.

[K2retire]

Thank you. I knew there was only one answer..lol How do you handle it with the HCEs as they take the distributions? Do you inform them up front that a part of this might have to be reclassified and they could expect a revised 1099R? I guess I'm looking for a way to "soften" the blow, but I just don't think such a thing exists.

We inform them of this possibility at the time we send them the termination resolution and encourage them to complete the testing BEFORE making the distributions.