Late Testing/Refund Due

[Guest MS TPA]

Plan just submitted required information for yearend Compliance testing for PYE 12/31/08. Plan failed ADP testing and 1 refunded is required. Plan uses Prior Year testing. Due to lateness of the testing, What is the proper correction method:

1. Refund w/Excise Tax

2. Refund W/Excise Tax & QNEC

3. Just a QNEC

Any guidance and/or IRC refererence would be greatly appreciated as the CPA & I disagree.

Thanks!

[Tom Poje]

since it is this late, the correction methods are found under the EPCRS program, rev proc 2008-50

Appendix A

.03 Failure to satisfy the ADP test set forth in § 401 (k)(3), the ACP test set forth in § 401 (m)(2), or, for plan years beginning on or before December 31, 2001, the multiple use test of § 401 (m)(9). The permitted correction method is to make qualified nonelective contributions (QNECs) (as defined in §1 .401 (k)-6 ) on behalf of the nonhighly compensated employees to the extent necessary to raise the actual deferral percentage or actual contribution percentage of the nonhighly compensated employees to the percentage needed to pass the test or tests. The contributions must be made on behalf of all eligible nonhighly compensated employees (to the extent permitted under § 415) and must be the same percentage of compensation. QNECs contributed to satisfy the ADP test need not be taken into account for determining additional contributions (e.g., a matching contribution), if any. For purposes of this section .03, employees who would have received a matching contribution had they made elective contributions deferrals must be counted as eligible employees for the ACP test, and the plan must satisfy the ACP test. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in § 1.41 0(b)-6(b)(3)), in order to reduce the number of employees eligible to receive QNECs. Likewise, under this correction method, the plan may not be restructured into component plans in order to reduce the number of employees eligible to receive QNECs

or

Appendix B

(b) One-to-One Correction Method. (i) General. In addition to the correction method in Appendix A, a failure to satisfy the ADP test, ACP test, or, for plan years beginning on or before December 31, 2001, the multiple use test may be corrected by using the one-to-one correction method set forth in this section 2.01 (1)(b). Under the one-to-one correction method, an excess contribution amount is determined and assigned to highly compensated employees as provided in paragraph (1 )(b)(ii) below. That excess contribution amount (adjusted for earnings) is either distributed to the highly compensated employees or forfeited from the highly compensated employees' accounts as provided in paragraph (1)(b)(iii) below. That same dollar amount (i.e., the excess contribution amount, adjusted for earnings) is contributed to the plan and allocated to nonhighly compensated employees as provided in paragraph (1 )(b)(iv) below. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in § 1.410(b)- 6(b)(3)). Likewise, restructuring the plan into component plans is not permitted.