ACP refund processed and later determined too much was distributed

[RPP2001]

Plan has per payroll period matches for plan year 1/1/09 - 12/31/09. We ran the ACP test for this client and determined that an HCE needed a refund. The ACP refund was processed timely before 3/15/10.

Later, client determines that they did not calculate the 2009 matches correctly and therefore corrects this by depositing the additional matches to the plan. Now, we are re-running the ACP test and we find that the HCE who previously received the refund now should have had a lower refund processed. What is the correction for this excess distribution?

[DMcGovern]

Plan has per payroll period matches for plan year 1/1/09 - 12/31/09. We ran the ACP test for this client and determined that an HCE needed a refund. The ACP refund was processed timely before 3/15/10.

Later, client determines that they did not calculate the 2009 matches correctly and therefore corrects this by depositing the additional matches to the plan. Now, we are re-running the ACP test and we find that the HCE who previously received the refund now should have had a lower refund processed. What is the correction for this excess distribution?

How much is the overpayment? I believe there is a section in Rev Proc 2008-50 (update to EPCRS) that says you do not have to correct if the total overpayment is $100 or less. (see Section 6.02(5)©). You do have to notify the participant that the amount is not eligible for a favorable tax treatment.

[RPP2001]

Plan has per payroll period matches for plan year 1/1/09 - 12/31/09. We ran the ACP test for this client and determined that an HCE needed a refund. The ACP refund was processed timely before 3/15/10.

Later, client determines that they did not calculate the 2009 matches correctly and therefore corrects this by depositing the additional matches to the plan. Now, we are re-running the ACP test and we find that the HCE who previously received the refund now should have had a lower refund processed. What is the correction for this excess distribution?

How much is the overpayment? I believe there is a section in Rev Proc 2008-50 (update to EPCRS) that says you do not have to correct if the total overpayment is $100 or less. (see Section 6.02(5)©). You do have to notify the participant that the amount is not eligible for a favorable tax treatment.

The overpayment is $373. Also, since this was previously a distribution due to an ACP failure, it wasn't eligible for rollover anyways.

[DMcGovern]

The overpayment is $373. Also, since this was previously a distribution due to an ACP failure, it wasn't eligible for rollover anyways.

I don't know why the EPCRS states that you have to notify the participant that it's not eligible for rollover (when it wasn't in the first place), but that is the language in the Rev Proc.

Section 6.06(3) of the revenue ruling provides how to treat the overpayment. For a DC plan such as yours, the employer must take reasonable attempts to recover the overpayment (plus applicable interest) from the participant. Any amount returned that is less than the amount calculated due back (or if unrecoverable), the employer "or another person" must contribute the difference to the plan. "The Overpayment, adjusted for earnings at the plan's earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.02(2) [unallocated account established for the purpose of holding Excess Allocations to be used to reduce employer contributions in the current year and succeeding year(s)], (or if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan's allocation formula). In addition, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment....."

Hope this helps!

[RPP2001]

Great! This is what I found in EPCRS too, but, it was in the section for 415 corrections so I kept questioning myself. Anyways, my question is then, how do you calculate interest/earnings to tell the person to return the money? Thank you!

[DMcGovern]

Great! This is what I found in EPCRS too, but, it was in the section for 415 corrections so I kept questioning myself. Anyways, my question is then, how do you calculate interest/earnings to tell the person to return the money? Thank you!

Generally, in that revenue procedure it provides for an earnings rate based on the investment results that would have applied as if the failure did not occur. The correction section that I quoted previously mentions that it would be the plan's rate of return. It seems as though you would obtain an average rate of return for the plan for the year in which the excess distribution occurred and apply that rate to the principal amount for the period of the failure. Seems like the period of the failure would start with the date of the distribution and end when they correct it by depositing the funds in the separate account.

It does seem reasonable to use the rate of return for that participant for the year, but since the revenue procedure specifically states the rate for the plan, not sure if that would fly.

Any one else deal with this?

[Guest kmoroney-tps]

I have a similar situation. However, the employer has asked if they can simply put the money back into the plan, rather than ask the employees for the money back. I assume they want to avoid having to amend the 1099's and inconvenience the HCE's. Is this OK? I read in the Rec Proc that they employer will need to step in if they cannot get all the money back from the participant. Maybe this is the loop hole they are looking for to avoid going to the participant at all.....?

[BG5150]

If the participant pays it back, does it have basis? Or does his taxes have to be redone?