ACP refund not made

[R. Butler]

Plan fails 2008 ACP test. Refund required was $80; it didn't get made. Using the 1 to 1 correction plan sponsor can make the refund and then make a qnec of that same amount. The qnec should be allocated pro-rata, based on compensation, to all eligible NHCE's. The difficulty is that there are close to 100 eligible NHCE's. Is there a deminimus amount before you have to allocate to a participant?

Thanks in advance for any guidance.

[BG5150]

Check EPCRS. There are several 1-to-1 QNEC allocation methods allowed; the QNEC doesn't necessarily need to go to all eligible NHCE's that year. You may be able to whittle down the number of people to whom you must make the contribution.

[Kevin C]

For the de minimis part, take a look at Rev. Proc. 2008-50, Section 6.02 (5) Special exceptions to full correction.

[R. Butler]

I've read Appendix B, Section 2.01

This plan uses prior year testing. Both correction examples provide that the corrective contribution is allocated to the eligible NHCE's for 2005, pro-rata to comp.

Paragraph (1)(b)(iv)(B)(1) specifically applies to plans using the current year method. It does provide that the corrective allocation can be made to the account balances of those employees who are still employees during the year of correction. Even though rhe plan uses prior year testing; I don't see a reason why the principle still wouldn't apply. Having said that can an argument be made that the QNEC can be made to only those employees who actually have an account balance? We are still going to have 40-50 employees without balances getting a $2 or less QNEC that they will never actually see because any fee will eat thta up almost immediately.

Thanks in advance for any guidance.

[fiona1]

This specific question was posed on an IRS EPCRS phone forum on August 24, 2010 - given by Avaneesh Bhagat, an EPCRS coordinator.

Here is the answer - exactly what Kevin stated above:

When using the one-to-one correction method can you have situations where the methodology results in the employee's getting de minimis amounts and so really practically you might want to come up with a somewhat different approach to allocate the QNC that's used to correct the ADP test using the one-to-one method? The answer is probably you could. You may want to consider the exceptions to full correction provided in Section 6.02 of the revenue procedure, and that includes a provision relating to the delivery of small benefits. That provision might support the rationale you might use in coming up with an approach that the revenue procedure might otherwise consider to be less than full correction.

See page 17 of this transcript:

http://www.irs.gov/pub/irs-tege/epcrs_phon..._transcript.pdf

[R. Butler]

Thank you.