ADP/ACP testing, our economy, and gap earings for post 2007

[buckaroo]

I have been doing some thinking about the ADP/ACP testing for plan years beginning on or after 1/1/2008 and I think I have come up with something interesting based on the current status of our economy (at least for this testing season).

Let’s say ADP testing is being performed on a 2008 calendar year plan on 4/1/2009. When I process the test, I find that one HCE (not CUC eligible) is due a refund of contributions of $5,000. When I calculate the earnings (through 12/31/2008) on the refund, I come up with -$2,500. Now I know that gap earnings are no longer required on ADP refund distributions, but they can be optional based on how the documents are written. Therefore, in this case, if the document supports the option for the calculation of gap earnings utilizing either methods, I think that I could use the safe harbor method. If I do so, I take 10% of the earnings for every month. If I wait for ten monthly periods, I will have gap earnings equal to -$2,500. If I add this to the earnings previously calculated (-$2,500), I have total earnings of -$5,000. When I add this to the contribution amounts to be refunded, the refund amount is $0 ($5,000 - $5,000). (I hope I have written this so that it makes sense.)

Does this sound correct? I think it is, but I am trying to see if anyone can poke any holes in this. Any comments would be greatly appreciated.

(Please note that the plan sponsor will still have to pay the 10% excise tax.)

[MSN]

Are the gap earnings really optional? A few weeks ago I posed this very question to our ERISA counsel and was told that the gap earnings were not optional. I'd be interested in hearing how you came to the conclusion.

[fiona1]

The ERISA outline book states that the distribution of gap period earnings are not required for post-2007 plan years. I don't see anything that says they are not allowed, so long as the document requires they be included.

I assume its possible to have a situation described by the OP. None of our documents have gap wording in them, so we will not be including those earnings in refunds for post 2007 plan years. Interesting to think about.

[buckaroo]

I saw the same informaiton in the EOB. However, after the post from MSN, I took a look at PPA Section 902. It amends 401(k)(8)(A)(i). From what I read, it appears that the issue could be interrpreted as gap earnings no longer permitted. Since I am not an attorney, I have asked colleagues (one of whom is an attorney) for their interrpretation. I hope to get clarification soon.

[fiona1]

Nice. Let me know what you find out.

[buckaroo]

This is the response I recevied on whether gap earnings were permitted:

It does appear you can't use gap earnings on refunds. However, it's based on proposed regs and not final regs. Proposed Treas. Reg. 1.401(k)(2)(iv)(A) states that the "income allowable to excess contributions is equal to the allocable gain or loss through the end of the plan year." It deletes the entire section of the regs regarding gap earnings and its calculation.

So, it appears that MSN's ERISA council was correct. Therefore, the OP is not an issue at all.

MSN,

Thanks for the correction.

[fiona1]

Thanks for the post.