Eligible in 2 plans, defers max in both

[John Feldt ERPA CPC QPA]

1/3 owner (Guy) of Glass Company. Defers max ($15,500) in Glass 401(k) Plan. No related other owners.

Same guy: 100% owner of Stone Company. Defers max ($15,500) in Stone 401(k).

Guy wants to pick which plan will return the 402(g) excess.

Looks like Glass plan will fail ADP (breaks), but the Stone plan will pass (solidly).

Can Guy have the 402(g) excess refunded entirely from the Glass Plan? If so, will any of that deferral count in Glass plan's ADP test?

[QDROphile]

What does the Glass plan say about return of elective contributions at the direction of a participant because of an excess caused by elective contributions to another plan?

[Guest Sieve]

I don't think plan language matters. See Treas. Reg. Section 1.401(k)-2(a)(4)(ii) & -2(a)(5)(ii): even if returned, excess HCE & NHCE deferrals (i.e., deferrals exceeding 402(g) limits) are included in the ADP test (except that NHCE deferrals are not included in the ADP test if they violate the rules--i.e., if the 402(g) limit is exceeded for a single plan, like $18,000 deferred into one plan for someone not eligible for the catch-up). Treas. Reg. Section 1.402(g)-1(e)(1)(ii) says the same thing.

[QDROphile]

What do you think about Treas. Reg. section 1.402(g)-1(e)(4) that requires plan provisions for distribution of excess deferrlas?

[Guest Sieve]

But the regs I cite--including Treas. Reg. Section1.402(g)-1(e)(1)(ii)--say the ADP is not impacted by the return of excess deferrals (except if an NHCE exceeds the 402(g) limit in one plan). So what do you think of Treas. Regs. Sections 1.401(k)-2(a)(4)(ii) & -2(a)(5)(ii)?

The result is that excess amounts can be returned to prevent a 402(g) violation for the participant, but ADPs are calculated for both entities as if the excess deferrals are NOT returned (as long as an NHCE's deferral does not exceed $15,500 to a particular plan).

[QDROphile]

But how can a plan return an excess without a plan provision that allows for a return, especially when the deferrals under that plan are within the limits?

[Guest Sieve]

QDROphile --

You misread Treas. Reg. Section 1.402(g)-1(e)(4) in Post #4. That reg. indicates that a 402(g) correction can only be made if the plan provides for a return of excess deferrals--it does not require that plans must provide for returns (as evidenced by the last sentence of that reg: "A plan need not permit distribution of excess deferrals"). See, also, the first sentence of Treas. Reg. Section 1.402(g)-1(e)(2): "A plan may provide . . ." (emphasis added).

So, a return of excess deferrals is permissive on a per plan basis. And you are correct in your latest post that an individual is therefore not protected from a 402(g) violation unless one of the plans permits a return of any excess. However, it would be a big surprise (to me, anyway) if a plan did not provide for it. Assuming the Glass Plan does provide for the return of any excess deferrals, then the entire necessary return could come from that plan alone. So, that would solve the participant's 402(g) problem.

In addition, the OP wondered if the return could permit an ADP failure to self-correct by removing the returned HCE deferrals from the ADP test. I may not have been clear in my earlier responses, but even if a return is permitted by the language of the Glass Plan, that return will not impact the ADP--the excess deferrals still will be included in ADP calculations (subject to the condition for NHCEs which the regs mention).

But, you are correct that an excess deferral return is not permitted if the plan does not so provide.

[John Feldt ERPA CPC QPA]

The language in the plans allow a choice to be made regarding which plan refunds the 402(g) excess.

However, to illustrate a point and purpose of the OP, let's suppose this is the first year for both plans, and the HCE is the only HCE in the plan.

Deferral $15,500 to Glass plan - all is refunded (402(g) excess).

Deferral $15,500 to Stone plan - none is refunded.

So far okay, but:

ADP fails for Glass plan. Is the Glass plan now required to do a QNEC to pass (since no more $$ are left to do a deferral refund for the HCE?) Or is the refund that has been done for 402(g) excess purposes also count toward making the failed ADP test's refund?

[QDROphile]

"Can Guy have the 402(g) excess refunded entirely from the Glass Plan? If so, will any of that deferral count in Glass plan's ADP test?"

I think we are reading the questions differently. We seem to agree on the reading of the regulations. Treas. Reg. section 1.402(g)-1(e)(4) answers "Can Guy have the 402(g) excess refunded entirely from the Glass Plan?" with "only if the plan has terms to allow Guy to elect to have the refund from the Glass Plan."

The ADP question is "does it help to have Guy elect to have the refund from the Glass Plan?" But that is a separate following question, and I take my questions one at a time.

If the answer to the first question is that the plan does not allow a refuned from the Glass Plan, you don't have to address the second question.

[John Feldt ERPA CPC QPA]

Yes, the plan allows the 402(g) excess refund to be made from the Glass plan.

[John Feldt ERPA CPC QPA]

The 402(g) excess is ignored for runnning ADP testing, but it should be considered when the refunds are determined due to the failed ADP. Agree?

If so, then (assuming this is the only HCE) a full deferral into Stone was okay and a full refund from Glass is okay.

[Mike Preston]

I thought earlier in the thread it was said that the 402(g) excess is not ignored.

I thought there was an example in the regs that allows the correction to take place before the return. Wouldn't that solve the problem?

[John Feldt ERPA CPC QPA]

Yes, sorry Mike, the previous post should have read:

The 402(g) excess is not ignored for runnning ADP testing, but it should be considered when the refunds are determined due to the failed ADP. Agree?

If so, then (assuming this is the only HCE) a full deferral into Stone was okay and a full refund from Glass is okay.