ADP refunds following a hardship

[K2retire]

I have a situation where a plan has failed their 2009 ADP test with one HCE. Normally, a refund is required and send the HCE his refund check, but this case is somewhat different. Let say his refund is $2k but only has $1k left in his account balance. Why do you ask?? He took two good size hardships in 2009 totalling $38,000. Do I take his current balance out ($1,000) for the refund, or does the hardship cover his full ADP refund?

[Kevin C]

I think he will have to get a distribution of the remainder of his account balance. I don't see hardship listed as one of the exceptions in the first highlighted sentence below. A prior distribution of his entire account balance is deemed to be a corrective distribution under the last sentence. That isn't exactly the case here, but I think it still fits. If you distribute the available funds towards correction, but don't have enough to cover the full correction amount, you have only made a partial correction. At that point, with his account balance gone and the excess not fully corrected, I think the last sentence would apply.

1.401(k)-2(b)(v) Distribution. --Within 12 months after the close of the plan year in which the excess contribution arose, the plan must distribute to each HCE the excess contributions apportioned to such HCE under paragraph (b)(2)(iii) of this section and the allocable income. Except as otherwise provided in this paragraph (b)(2)(v) and paragraph (b)(4)(i) of this section, a distribution of excess contributions must be in addition to any other distributions made during the year and must be designated as a corrective distribution by the employer. In the event of a complete termination of the plan during the plan year in which an excess contribution arose, the corrective distribution must be made as soon as administratively feasible after the date of termination of the plan, but in no event later than 12 months after the date of termination. If the entire account balance of an HCE is distributed prior to when the plan makes a distribution of excess contributions in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contributions (and income) to the extent that a corrective distribution would otherwise have been required.

[rcline46]

I would stretch it this way - hardships are not rollable, nor is the ADP refund. I would use the hardships as covering the deferral amount, but NOT the earnings amount. I think the additional amount due to earnings should be distributed from the $1,000 left in the account.