Corrections to HCE Give-backs

[Cynchbeast]

Give-backs were used to correct failed ADP test for PYE 06/30/07. Our client now informs us that the "Gross Compensation" used on that year's census was miscalculated and was actually net after deducting cafeteria and deferrals. We have rerun calculations with correct gross compensation and the results are that 3 or 4 HCEs were refunded about $104 too much.

We are now almost 2 years past PYE. How is this corrected?

[Tom Poje]

for testing purposes you are permitted to use a definition of compensation that satisfies 414(s).

using (comp - deferrals) satisfies that definition, so unless your document specifically defines compensation for testing purposes differently there is nothing wrong with the way the test was performed. (check definition of 414(s) compensation in the document)

whether the test was performed to the greatest benefit of the HCEs is a different matter.

other examples: using comp from date of entry rathet than full year comp, testing otherwise excludables separately, etc...all these testing assumptions would produce different results

[Cynchbeast]

Tom -

Definition of Comp includes deferrals. So what now?

[Tom Poje]

the term compensation can mean a lot of things.

it can refer to what is the profit sharing allocation formula based on.

does the document have a definition of 414 s compensation?

alphabetically it is usually would be under 'f' (e.g. the same as Four-fourteen)

[Cynchbeast]

Thank you Tom for your help. But my issue is not with the definition of compensation, so let's just assume the definition of comp in the plan documents includes deferrals and the cafeteria plan. Since we tested on the wrong figures, how do we go about addressing the fact that the HCEs were refunded too much?

[Bill Presson]

Thank you Tom for your help. But my issue is not with the definition of compensation, so let's just assume the definition of comp in the plan documents includes deferrals and the cafeteria plan. Since we tested on the wrong figures, how do we go about addressing the fact that the HCEs were refunded too much?

I believe that what Tom is trying to say is that your testing compensation does not have to be the same as the allocation compensation defined in your document. You are able to use another definition as long as it satisfies 414(s).

[Bird]

In other words, the desired result in this instance is not to correct a problem, but to conclude that there is no problem.

[BG5150]

Check the section in the document that addresses the 401(k) and 401(m) tests. It may call for testing using any comensation allowable under 414(s).

For example, one of the documents we use specifically says that the ADP is the ratio of contributions to 414(s) compensation. It makes no mention as to what the "defininition" of compensatoin is in the adoption agreement.

[Cynchbeast]

Thanks to all. Now I see where Tom was going. But I checked Adoption Agreement, and under Testing Compensation, for determination of ADP/ACP it includes "...any amount which is contributed by the Company pursuant to a salary reduction agreement and which is not includable in the gross income of the Employee under Code sections 125, 402(e)(3), 402(h), 403(b), 132(f) or 457"

So again, for argument's sake, let's just assume that the refunds to HCEs were too much. A year and a half after PYE, how do we go about correcting this? Given that the errors are just a little over $100, what would the ramifications be of ignoring the whole thing?

[Tom Poje]

as close as you are going to come under EPCRS is 6.02 (5)© which says if total amount of overpayment is $100 or less the Sponsor is not required to seek return of overpayment.

arguably, any correction should be adjusted for earnings, and since the market has dropped just a tiny little bit the last year you are probably under $100.