ADP/ACP testing error

[Guest Sara H]

I am wondering if somebody could give me a suggestion of what to do. I ran the ADP/ACP test for one of our clients assuming that all employees' eligibility was coded correctly in our system and the ADP test failed. The HCE's have been paid out to correct the test I ran. I am now completing the SAR and now realized that some employees were coded as ineligible so they were not included in the test. Had they been included, the ADP test would have passed. What do I do?

[Alf]

The IRS should not care too much because only HCEs were "hurt," but it still is a qualification defect involving the failure to follow the terms of the plan. We dealt with the IRS on a similar overcorrection due to an incorrect ADP test, but it was discovered on audit, so we settled in in Audit CAP. It was not a big issue. You should probably fix the problem the best you can under APRSC (although you will not technically qualify because you cannot fully correct the defect unless all of the HCEs repay the mistaken distributions to the plan) and ask the HCEs to return the incorrect distributions, even though all of them may not do so.