Earnings on Refunds for Failed ACP

[MBCarey]

We have a plan that failed the ADP/ACP Test. The deferral correction amount was recalculated as Catch-up. But I still have to refund the excess match money that was deposited for this participant to correct the test. The match refund is going to be transferred to the Plan Forfeiture account to be used to offset future employer matching contributions.

My questions is do I need to calculate the gains associated with the match refund amount and transfer that to the forfeiture account?

Thanks

[austin3515]

Why are you forfeiting?

Is it a) because the participant is not 100% vested in the match, or b) because you have "orphan match"?

Either way, yes, you would adjust it for gains. I just wanted to make sure you were really supposed to forfeit it.

[MBCarey]

The excess match is being transferred to the forfeiture account because the document states: "In the event the Plan fails the ADP Test and Excess Contributions are returned to Highly Compensated Employees, any corresponding Matching Contributions that are not returned because of a simultaneous failure of the ACP Test (Excess Aggregate Contributions) shall be forfeited, even if vested, from the Matching Contribution Account of the affected Highly Compensated Employees. Unless otherwise elected in the Adoption Agreement, such forfeited amounts shall be first used to reduce Employer Contributions that otherwise would be made for the Plan Year."

Excess Contributions were no returned to the employee because he is over 59 1/2 and it could be recharacterized as "catch-up" but the ACP test still had to be corrected so I assumed base on the above statement, the money could be transferred to the forfeiture account.

I understand that earnings have to be transferred as well based on your answer, but am I doing something incorrect by transferring the money to the forfeiture account to be used to offset future match.

Thanks

Is it a) because the participant is not 100% vested in the match, or b) because you have "orphan match"?

Either way, yes, you would adjust it for gains. I just wanted to make sure you were really supposed to forfeit it.

[Tom Poje]

lets make sure this is really done correctly

based on your comments, plan failed both ADP and ACP

if you correct the ADP test first, then you may have 'related' match, and if so, any related match would be forfeited. that makes sense. Since catch up contributions could be matched (depending on the document) it would be my understanding these would not be forfeited.

The reason matches are forfeited to prevent an HCE from receiving at a higher rate than other people, but if the plan matches catch-ups then the higher rate rule doesn't come into play.

plan could run ACP test first, and fix that first. in that case, the match would be distributed, vesting may come into play, but there are even special rules that could be followed to avoid forfeiting match money if the individual is partially vested. this should be possible based on your document language which you indicated

"corresponding Matching Contributions that are not returned because of a simultaneous failure of the ACP Test (Excess Aggregate Contributions) shall be forfeited"

[austin3515]

LEt;'s back up though because if the plan matches catch-ups, then there would not be any orphan match, and the only reason for forfeiting would be that he is not 100% vested.

So assuming the guys is 100% vested, you just run your ACP test and refund to him whatever the excess amount is.

[Tom Poje]

Austin:

lets suppose my balance is $1000.

I am 40% vested

and as it turns out my ACP refund is $400.

so I could refund the 400

now my balance would show as $600

40% vested

vested balance = $0

(because the vested balance has already been paid)

[austin3515]

Tom, I had never heard that before - is that really how it works?? I thougth you paid 40% of the refund amount - so pay 160, forfeit 240. Am I blowing a basic concept?

[MBCarey]

Sorry guys, I am even more confused than ever. Catch-up contributions are not eligible for matching contributions. I recharacterized his deferrals as catchup so that the ADP would pass which then resulted in the ACP Correction refund amount. He is 100% vested in the match money.

Help me understand if you have time...

[austin3515]

"Catch-up contributions are not eligible for matching contributions"

Are you positive? Becuase that would be extremely unusual... Allowing catch-ups to get the match really only affects this exact situation (generally)...

[MBCarey]

I did not do the document, but the Section that refers to Employer's electon to match Catch-up Contributions is not checked

"Catch-up contributions are not eligible for matching contributions"

Are you positive? Becuase that would be extremely unusual... Allowing catch-ups to get the match really only affects this exact situation (generally)...

[Tom Poje]

I wouldn't say its that unusual. remember the matching contributions are still included in the ACP test, so it could cause the plan to fail. if you are matching during the year, I certainly wouldn't recomend it because its a pain in the rear - you have to forfeit the match even if you don't fail the test. However, you are required to match if the plan is safe harbor 401k, but it would be unusual to have to match a catch up in those plans - because they dont fail ACP (as a general rule), the basic match is only up to 5% deferred, etc.

Austin - my understanding is the vesting is optional (so you are not blowing anything) how you want to handle. I'd have to dig back through my notes and see if I can find a site for you (besides something like "Blinky said so".

[Molly the cat]

austin3515 - most of our documents did not select match on catch up. I don't remember the reason behind it at this time, but we did have a reason. Even if that reason makes no sense at this time---you know how it is sometimes....

MBCarey - I agree that this is very confusing. But if you simply failed ADP, you don't match on catch up, and some or all of the deferrals are reclassified as catch up, then you could have orphan match (aka ATM). As indicated, those amounts (including gains), are forfeited regardless of vesting. If you fail the ACP test, which your subject line is indicating, then it isn't all forfeited. Just the non-vested would be forfeited, but the vested would be refunded. However, you could run the ACP test first as Tom Poje indicated and maybe it would all end up being refunded (or more if only partially vested) and none would be orphan match. Our document says this, but to be honest, it may be hard to code in your software.

[austin3515]

MBCarey - I agree that this is very confusing. But if you simply failed ADP, you don't match on catch up, and some or all of the deferrals are reclassified as catch up, then you could have orphan match (aka ATM).

Not necessarily. It depends on the match formula. If your match formula is 50% on the 1st 6%, then you only have orphan match if the remaining non-catchup deferrals are less than 6% of pay. If it drops to say, 5%, then the orphan match is the match that was "born" of the reclassified 1%.

Unless you are matching at extremely high rates of deferrals, excluding catch-ups generally has no effect. You would need to be matching on deferrals of more than 6% of pay for this to ever have an impact because 16,500 out of 245,000 is over 6% of pay. Comp of less than 245K means the deferral rate is above 6% of pay. So in almost all cases, the only affect of not matching catch-ups is creating this orphan match situation, which I think would be unintended by most plan sponsors who I would think generally do not want their key employees to forfeit the match they were given.

But if I am missing something, please let me know.

[Tom Poje]

Austin -

in regards to vesting, fortunately my brain was actually functioning one day, and I included a comment about it in the book I helped contribute on, so it was easy to find the reg.

see 1.401(m)-2(b)(5) example 7.

[Molly the cat]

Austin - I think we are mostly on the same page. That's why I indicated that you "could" have orphan match. As you stated, it does depend upon your match formula. But I disagree that you need have to have a rich match formula (matching above 6%) to cause this problem. Because if your NHCE's % is low, your HCEs % is also limited to a lower amount. If NHCEs are only at 2.73%, HCEs can only do 4.73% but did 6%, and match is up to 6%, you have orphan match---if your document says you don't match on catch up (which in my case is most of our documents). Those darn NHCEs just really need to contribute at a higher % !!!!

[austin3515]

I meant that not matching catch-ups generally only comes into play when the matching rate is generous (and that therefore not matchign catch-ups principally serves to make orphan match more likely). I agree that the orphan match thing can arise with any match formula.