HCEs Took Distribution/Plan Fails ADP Test

[Guest Liz Mikkelson]

During the course of the 1998 plan year, 2 HCEs terminated and took distributions from the plan. One did a direct rollover and the other took a cash distribution. Now it appears that the plan fails its ADP test for 1998 and that these employees should have received distributions of excess contributions. Any thoughts or guidance on how to resolve this? Additionally, does this mean that HCEs can't take distributions during the plan year? In this situation, HCEs were advised to not defer to this level because they wouldn't pass the test but some continued to defer anyways. A further complication, the plan has now terminated.

[Disco Stu]

This happens all the time. Just issue revised 1099R forms that reflect the distribution as they should have happened. The plan administrator will have to notify the HCE that rolled over, that portion of what was rolled was not an eligible rollover distribution. As long as the plan admin. puts something in writing, the HCE shouldn't have too much trouble getting the $$$ out of his/her new plan.

As for the guy that took cash...not a big deal for him/her. You'll have to change the 1099s, but essentially the only thing different for him/her is that less of the distribution may be subject to the early withdrawal penalty.

Off the top of my head, I don't think the fact that the plan is terminating has any effect on this.