ADP - ACP Failure

[Lou S.]

Plan match formula is 50% of all deferrals (including catch-up) and has only one HCE. Assume no earnings to make it easier.

The inital ADP refund is calcualted as $5,000 but $1,000 is recharaterized as catch-up eligible and retained by the plan so the ADP refund of excess contributions is $4,000.

The Plan also fails the ACP test and needs correction of an additional $5,000 for the match to pass. - the plan's ACP correction is method in the document is to refund the excess aggregate contribution to HCEs however any match "related to excess contributions" is forfieted.

The related match on the intial refund amount is $2,500 (half the $5,000) but the related match on the actual amount distributed would only be $2,000 (half the $4,000 ADP correction).

So for the excess aggregate contribution would the plan refund $2,500 and forfeit $2,500 or refund $3,000 and forfeit $2,000?

Any thoughts?

[Tom Poje]

myth - a young damthel, thumbtime in dithreth

another myth - you must run ADP test first.

there is no requirement that the ADP test is run first. in fact

1.401(m)-2(b)(3)(v)(B) says you determine level of match after correction of excess aggregate contributions. Thus if you run the ACP test first and fix that first, you might not have any related match to forfeit - you never get to that point.

IRS officials have indicated this as well as ASPPA Q and As.

Q and A 18. ASPPA Conference 2004

There are two prevalent methods for performing the ACP test when

deferrals must be returned due to a failed ADP test: The first method

forfeits all matching contributions associated with the excess

contributions under the ADP test. The ACP test is then run. Under the

second method, the ADP and ACP tests are both run. Corrective

distributions are made first then any matching is forfeited if necessary.

Are both of these methods acceptable or is there one specific method

that should be used?

A: Either method is acceptable as long as it is in conformance with

the plan language. We believe most plans utilize the second

approach.

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I suppose a really poorly worded document might require otherwise.

[Lou S.]

thanks. I never really thought of it that way but makes sense you could run them in any order and correct that way, at least to me. Though the IRS I suppose could have a diferent ideas.