Correcting failed ADP test with transfer to 403b plan

[Pam S.]

We have a client that has a 401k plan and a 403b plan. The 401k plan adp test failed and it was suggested that the refund amount be transferred to the 403b plan instead of returning it to the participant as a refund. We can't seem to find anything in the regs about whether this is a viable solution. Anyone have any thoughts about this?

[MWeddell]

This sounds like a bad idea to me for at least 2 reasons.

1) The 401(k) regulations list the only permitted methods of correcting a test failure. (I'm assuming the plan year has ended.) Transferring excess contributions to a 403(b) plan is not one of the method listed so it is not permitted. I think if you review the structure of the regulations, you'll see that's how they work.

2) There was not a cash or deferred election to contribute these dollars to the 403(b) that was made prior to when the dollars became available in cash to the employee. Therefore putting them into the 403(b) plan now won't work.

[Pam S.]

This sounds like a bad idea to me for at least 2 reasons.

1) The 401(k) regulations list the only permitted methods of correcting a test failure. (I'm assuming the plan year has ended.) Transferring excess contributions to a 403(b) plan is not one of the method listed so it is not permitted. I think if you review the structure of the regulations, you'll see that's how they work.

2) There was not a cash or deferred election to contribute these dollars to the 403(b) that was made prior to when the dollars became available in cash to the employee. Therefore putting them into the 403(b) plan now won't work.

Thank you for your reply. I knew it must be too good to be true!