APRSC & ADP Failure

[Guest ELS]

My client's former TPA did not complete the testing for the Plan year ending 12/31/97 until March, 1999, and the client had an ADP/ACP failure. Rev Proc 98-22 provides that the client may correct the failure by 12/31/99 through the use of a QNEC allocated to NHCE's, which is one of the prescribed correction methods under SVP for this type of failure.

My question is whether it is sufficient for my client to correct the deficiency under APRSC by depositing the QNEC by 12/31/99, or if they must correct under VCR using the SVP rules and request an SVP compliance statement and pay the reduced compliance fee.

[Richard Anderson]

A correction method must be "reasonable and appropriate" for the failure. Any standardized correction method under SVP is deemed to be reasonable and appropriate.

Therefore, if the plan sponsor wishes to self-correct under APRSC, the SVP correction for a failed ADP test can be used.

In order to self-correct under APRSC several eligibility standards must be met.

1. The plan sponsor or administrator must have established practices and procedures reasonably designed to promote compliance.

2. The plan must have a favorable letter.

3. The plan must not be under examination.

For purposes of correcting failed ADP, ACP tests the two year correction period starts after the statutory 12 month correction period ends. The two year correction period would then begin on 12/31/98. A failed ADP for the plan year ended 12/31/97 could therefore be corrected under APRSC as late as 12/31/00.

[Guest Tom Geer Daily Access Concepts]

I agree with Mr. Anderson. Note that the 10% penalty tax will be due even after correction.

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[Guest ELS]

Would the 10% penalty be assessed on the amount of the QNEC? Thanks for your thoughts.

[Richard Anderson]

I beleive that the 10% excise tax applies if excess contributions are distributed after 2 1/2 months after the plan year end. I don't think that late correction by QNEC is subject to a penalty tax.

[Guest Gibson]

2 questions:

(1) With respect to APRSC's favorable letter requirement, can a plan sponsor that wishes to correct an ADP violation under APRSC claim that it has a favorable letter if the Prototype Plan Sponsor has an Opinion letter?

(2) Plan sponsor has a 1997 ADP test failure, makes corrective distributions within the appropriate period, but in 1999, based on revised figures, discovers that it has not fully corrected the error. Plan sponsor filed a 5330 to report the excess contributions based on the original tests. Can we now file an amended 5330 to report the additional excess contributions without paying any penalties? We are past the due date for filing for a 1997 failure.

Thanks.