ACP testing failure

[pmacduff]

ok - this has come up a lot lately in plans we have recently taken over and I'm starting to doubt my own memory! For a failing ACP test our plans all forfeit the match to the match forf. acct and it is then used to reduce future matching contributions.

I have a takeover plan, however, where the ACP failure matching contribution was paid out to the participant (and has been for quite some time throughout past years). (Let's assume for argument sake that the ADP test passes.) Is this acceptable? How can this be paid out to the participant? Why would the participant receive a 1099-R form for Employer match and pay tax on something that was not part of their payroll? I'm trying to get my arms around the logic of this procedure that was in place.

thanks in advance...

[Tom Poje]

tjhe failure of the ACP test results in excess aggregate contributions, and the regs say 1.401(m)-1(e)(3)(i)

are distributed ...to the appropriate HCE

there are 2 exceptions I can think of

1.401(m)-1(e)(3)(vii) if its not a failed test, but rather a related match to excess contributions, then it is forfeited

(though you can run the ACP test first and if it fails you can distribute those $ first)

the other exception is if the HCE is partially vested then you can only distribute the vested portion and forfeit the remainder. and even that rule is flexible - you can distribute the whole amount as long as you track the vested balance correctly.

[pmacduff]

Tom - do you know why the acp match correction is not forfeitable? I know this is a basic prinicipal of testing and goes way back, just don't follow the logic so please humor me.

I guess I'm also not use to having just the acp fail, usually it's just the adp.

[Guest LauraVanSteeter]

What if the ACP includes After Tax-any portion applicable would need to go back to the participant not forfeited.

[pmacduff]

so...that could explain why the acp correction is returned to the participant and not forfeited?

we don't have any plans left with employee after tax dollars - this is just Employer match $$.

[Tom Poje]

getting old and my 'sight' is going bad.

should have said 1.401(m)-2(b)(2)(v)

ooops, I used the old regs. But certain powers that be are kind enough to correct me.

I think the difference is that the person was still entitled to the match, therefore you distribute rather than forf.

as oppossed to an incorrect allocation - the person shouldn't have gotten it, so you forfeit it.

a similar rule applies if you don't match catch ups, then match related to deferrals that are treated as catch up are forfeited.

[pmacduff]

I guess I'm still trying to understand why anyone would care that the HCEs are getting a lesser match rate (if the plan forfeited the match as opposed to distributing to the HCE). I thought it was pretty much ok to discriminate against the HCEs!!

In the small plans forfeited match could benefit the business owner anyway, because it reduces the current match owed and lowers the amount of cash needed to fund current $$!

Sigh...

[Tom Poje]

on the other hand, getting the $ in the form of a distribution sounds like a good deal for the HCE.

now if I was an HCE....ha......................ha....ha ha ..ha oh never mind. that will never happen

[pmacduff]

Tom...sung to the tune of "If I were a rich man..."????? ("If I were an HCE....")

keep smilin'!!!

[Tom Poje]

if they hadn't of made Sunset provisions permament a few years ago, I was going to pen a song

Sunrise, Sunset

so don't get me started....

[K2retire]

if they hadn't of made Sunset provisions permament a few years ago, I was going to pen a song

Sunrise, Sunset

so don't get me started....

On the contrary, please continue!

[Guest Sieve]

I agree with K2. After all, there still are provisions which are subject to potential sunset (like estate tax exclusions). Put pen to paper (or finger to keyboard)!!

[GMK]

Sunrise, Sunset

so don't get me started....

Sorry, Tom, but we're not going to break with TRADITION.

[Tom Poje]

so in addition to "Fiddling" my time trying to complete ADP tests before the deadline, and complete document restatements you want me to write songs as well?

[Tom Poje]

geez, only under duress and such short notice

but with everything that is piled on my desk and how I feel at the moment it will have to do.

This job it seems to be so harried.

Why has my bushy hair turned gray?

I don't remember growing older

Work all day!

My account used to be a beauty.

When did it shrink to be so small?

I work for little pay

And that’s not all!

Sunrise, sunset

Sunrise, sunset

Swiftly flow the days

A-D-P failures and loan defaults

I’ve never even seen a raise

Sunrise, sunset

Sunrise, sunset

Swiftly fly the years

One plan is following another

Laden with too much work and tears

What words of wisdom can I give them?

How can I help to ease their way?

Now they must learn about their failures

Day by day

The I-R-S they want an audit

And I know who they’ll blame – it’s me

Is there an excise fee

in store for me?

Sunrise, sunset

Sunrise, sunset

Swiftly fly the years

One plan is following another

Laden with too much work and tears

[Guest Sieve]

Bravo! Well worth the wait.

[GMK]

Encore!

Wow. You come rushin' in here and pull off a miracle of miracles.

Good song choice, and I like the way you made it your own.

[Bill Presson]

Nicely done, Tom!

[K2retire]

Bravo! What a great way to start a weekend.

[Jim Chad]

Great Job! Tom! That really fits my mood.

[Guest HJoseph]

I have a similar issue, the 2010 ACP test failed, the HCE was 100% vested. The refund was processed by 3/15/2011, but was forfeited, not distributed to the HCE.

How do I correct?

[fiona1]

Is the money still sitting in a forfeiture account? Or has it been used?

Even though the match money was taken out of the HCE's account, an ACP correction hasn't been made since the funds have not been distributed as required. So to me that means using the EPCRS to self correct.

There are correction options in Rev Proc 2008-50 for the failure of not correcting a failed ADP/ACP test within 12 months. There are actually 2 methods outlined - one in Appendix A and another in Appendix B. Both involve a QNEC to be funded to the NHCE's.

I don't know if the improper forfeiting of money is a failure in itself though - and if the money has already been reallocated then additional corrections may be necessary.