Required match causes ACP failure

[Belgarath]

If I'm reading the regs correctly, this seems an unfortunate result, so I hope I'm missing something.

Client has matching formula of 50% of first 8%. Employees are 100% vested. The match for 2008 has not yet been contributed. When contributed, it will cause an ACP failure, necessitating a refund of some of the match.

According to 1.401(k)-2©(5)(i), if it isn't corrected within 2-1/2 months after the close of the year FOR WHICH the excess contributions are made, then employer is liable for the 10% excise tax under 4979. And 4979(f) provides no relief.

Is there something I'm missing, or is the employer just stuck? The way I read it, they are stuck. I've never happened to run into this situation before.

Thanks.

[Tom Poje]

I would have said 1.401(m)-2(b)(4)(i) but I find it hard to pinpoint the exact reg cite at times myself. (Though since its a match, it would have to be (m) rather than (k)

Since you only indicated ACP failure, are you implying the ADP test passes, and if so, you don't have anything you can 'shift' to the ACP test to help?

yes, it is kind of screwy that you have to put in a contribution that will cause you to fail the test and then have to pay a penalty.

[Belgarath]

Of course you are right on the citation. Brain cramp on my part. Actually, the ADP failed, but I didn't get into that issue, just wanted to confirm whether I was cracked on the excise tax.

[Belgarath]

Tom, just to amplify a bit, the ADP test failed, and the matching contributions that will cause the ACP failure are based purely upon the already reduced deferrals. 12/31/08 plan year end.

[Tom Poje]

I think you are stuck. even though the deposit of match is not until 'now', since the formula is fixed, you could have run the ADP/ACP test before the 2 1/2 month deadline and known the plan would fail. that wouldreally have been strange, because you would 'fix' the problem before the current match is made. I guess no gains on the match. and it would be impossible to do that if it was the first year of the plan. Of course all this assumes that unlike the clients I have, all your clients provide you data early in the year.

I suppose under 1.401(m)-2(a)(4)(iii) © if you waited until after the end of the current year to make the deposit (more than 12 months after plan year end) then there is no ACP test and thus no excess aggregate contribution. you then test the match under a(4) [see 1.401(m)-2(a)(5)]. of course, the deduction then shifts to the following year. strange rules.

I am not sure about your comments on "matching contributions that will cause the ACP failure are based purely upon the already reduced deferrals"

If I am matching $ for $ and the person defers $1000 then the match would be $1000 according to the terms of the document, even if the person had to take $50 for excess contributions - or at least how I see it.

Rate of match determined after corrections for failed test. 1.401(a)(4)-4(e)(3)(iii)(G).

this says to determine any rate of match after applying the rules of 1.401(k)-2(b)(1)(i) and 1.401(m)-2(b)(1)(i).

now, one of the rules under 1.401(k)..... is that you would forfeit the related match.

so which comes first, the chicken or the egg. Do you run the DAP test first, calculate the correction and the forfeiture and then run the ACP test, or can you run the ACP test first, fix that, and then run the ADP test. the results are different, and I believe the IRS has informally indicated either method is possible.

[MWeddell]

Perhaps the plan document can be interpreted so that the ACP test is part of the allocation formula for the match if the results are known before the match is allocated. This doesn't sound likely to me.

More promising idea is that some plan documents allow for contributions by HCEs to be capped as needed to pass the ADP/ACP tests. This provision is typically drafted thinking that cutbacks will happen during the plan year, but it might fit your situation.

If those ideas don't work, yes, I think you're stuck.

[Belgarath]

Hey Tom -

"I am not sure about your comments on "matching contributions that will cause the ACP failure are based purely upon the already reduced deferrals"

If I am matching $ for $ and the person defers $1000 then the match would be $1000 according to the terms of the document, even if the person had to take $50 for excess contributions - or at least how I see it."

What I was trying to say was that the match is based upon the deferrals remaining after the ADP correction. So to use your dollar for dollar example, person defers $1,000. ADP test fails, and $500 must be refunded. Required match is now $500, not $1,000. The plan (IRS approved prototype) specifically provides that the Employer shall not make the otherwise fixed matching contribution on a deferral that must be distributed in a corrective distribution. That isn't the exact language - I'm paraphrasing here, but that's the result.

Anyway, thanks to all for the input.

[Tom Poje]

interesting. I didn't think you could do that in a document in regards to the match.

for example, if the HCE was the only one that deferred, even though the deferral is distributed the plan would still have to make top heavy if required.

I'd have to check through some old Q and A's and see if the IRS expressed an opinion on what you are describing.

[Belgarath]

Well, hang on a second. I didn't say they could avoid top heavy. Just that portion of the match attributable to the deferral that is being refunded. In this particular case, plan isn't top heavy anyway.

Figuring this stuff out makes me think of that scene in "Marathon Man" where Laurence Olivier is torturing Dustin Hoffman in the dentist's chair with dental instruments. I think Dustin had it easy compared to dealing with qualified plan regs.

[Tom Poje]

I realize that. my comment wasn't meant to imply the plan was or wasn't top heavy, rather it would seem inconsistent to ignore excess contribution in determining match, but you consider the excess for top heavy and non-discrimination. but of course, anything is possible, the regs are a strange animal.

[Tom Poje]

Belgarath - I did try a search of the ASPPA Q and As, the question was actually asked (I think in 2007) if you had to match excess contributions, but no answer, the agent was going to look into it, and that is as far as it went.

I have seen the language you described in a document, and again, it just seems strange to me you could do this, but what the heck. Its interesting, the HCE loses out on the deal, because otherwise he would receive the excess aggregate contribution due to the ACP failure, but I guess you save some on the excise tax.