Failed ADP

[Guest BarbaraG]

ADP test fails - one of the HCE's terminated, the plan has immediate distribution and he immediately rolled his money into an IRA. I'm not sure how to proceed. Any suggestions?

[Tom Poje]

this was an old discussion on the issue, but I believe still valid

http://benefitslink.com/boards/lofiversion...php/t10571.html

[DMcGovern]

ADP test fails - one of the HCE's terminated, the plan has immediate distribution and he immediately rolled his money into an IRA. I'm not sure how to proceed. Any suggestions?

I had a similar situation come up recently. Regulations provide that if the entire balance of an HCE is distributed prior to when the plan makes a distribution of excess contributions, 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. See 1.401(k)-2(b)(2)(v).

Your plan would issue Form 1099R showing the eligible rollover distribution amount, and a second Form 1099R showing the corrective distribution amount.

The issue is that the IRA accepted funds that are not eligible for rollover, so it should distribute the amount that is recorded on the second 1099R. The IRA holder would also issue a 1099R showing the gross amount, with a taxable amount of zero.

[Guest BarbaraG]

Thank you!

[Tom Poje]

My understanding of that rule 1.401(k)-2(b)(2)(v).

it only applies "in the event of a complete termination of the plan"

[DMcGovern]

My understanding of that rule 1.401(k)-2(b)(2)(v).

it only applies "in the event of a complete termination of the plan"

I don't have the full regulation, but here is what was sent to me:

"1.401(k)-2(b)(2)(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 papgraph (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 dsignated 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 an distribution of excess contributions in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contribuitons (and income) to the extent that a corrective distribution would otherwise have been required."

I could be wrong (often am), but I read this to include both active and terminating plans. Maybe I am missing part of this reg?

[Lou S.]

Very timely just got one of these today. Thanks for this thread and the linked one by Tom

Question about the 1099-R though (referenced in linked thread), the 1099-Rs went out in January and we are doing the test in February, do you prepare an amended 1099-R? And if yes what if you use a bundled provider that is reluctant to prepare corrected 1099-Rs?

Any thoughts appreciated.

[Tom Poje]

DMcGovern

Q25 from the 2004 ASPPA Conference was as follows. (of course such comments reflect the opinion of the IRS individual and not necessarily the Treasury position)

Suppose you have a 401(k) plan that fails ADP/ACP testing where the

correction will be made by making distributions to the HCEs.

Suppose you find this out after an HCE has already taken a complete

termination distribution from the plan and it was directly rolled into

an IRA or another plan. What is the plan’s responsibility?

A: The plan must notify the participant. See 1.401(k)-1(f)(4)(i). [this goes back to 2004, so refers to the old regs, but the paragraph is exactly the same as the one in question in the new regs]

Does it need to contact the other plan or IRA?

A: No.

Is it enough to notify the participant?

A: Yes.

Do 1099's need to be re-done with regard to the rollover?

A: Yes. See the instructions to the 2004 1099R form.

........................

I have always thought that when the paragraph says "In the event of a complete termination of the plan..." it means everything that is mentioned after this point only refers to a complete termination of the plan. Certainly that would agree with the IRS position from the 2004 conference.[but the english language is what it is, and arguably you might have a point0

the other part of the paragraph says "a distribution of excess contributions must be in addition to any other distributions made during the year ", which certainly seems to hold to the ASPPA Q and A as well.

[DMcGovern]

Maybe I am reading this wrong, but the ASPPA Q&A seems to follow what I did for my plan:

1. Plan A, which had the failed ADP test notified the terminated participant that a portion of the full distribution that was rolled over to another QP was not eligible for rollover. (follows the first three answers)

2. Plan A also amended the original 1099R from the full amount as a rollover to two separate 1099Rs - one for the eligible rollover and one for the corrective distribution. (follows the fourth answer)

3. The participant then notified the QP that accepted the rollover and they distributed the amount to him, issuing a 1099R to report the distribution, but coded it as zero amount taxable. (this seems to be the part that is most argued, particularly in your earlier link?)

I read the other email thread regarding the IRA account and how that needs to be handled. That one also seemed to be arguable either way, or yet another "gray" area in our world.

Does seem like both situations could be subject to personal interpretation. Thanks for the info!

DMcGovern

Q25 from the 2004 ASPPA Conference was as follows. (of course such comments reflect the opinion of the IRS individual and not necessarily the Treasury position)

Suppose you have a 401(k) plan that fails ADP/ACP testing where the

correction will be made by making distributions to the HCEs.

Suppose you find this out after an HCE has already taken a complete

termination distribution from the plan and it was directly rolled into

an IRA or another plan. What is the plan’s responsibility?

A: The plan must notify the participant. See 1.401(k)-1(f)(4)(i). [this goes back to 2004, so refers to the old regs, but the paragraph is exactly the same as the one in question in the new regs]

Does it need to contact the other plan or IRA?

A: No.

Is it enough to notify the participant?

A: Yes.

Do 1099's need to be re-done with regard to the rollover?

A: Yes. See the instructions to the 2004 1099R form.

........................

I have always thought that when the paragraph says "In the event of a complete termination of the plan..." it means everything that is mentioned after this point only refers to a complete termination of the plan. Certainly that would agree with the IRS position from the 2004 conference.[but the english language is what it is, and arguably you might have a point0

the other part of the paragraph says "a distribution of excess contributions must be in addition to any other distributions made during the year ", which certainly seems to hold to the ASPPA Q and A as well.

[Tom Poje]

that all sounds fine, though I am a bit shaky on the 'zero amount taxable'

was it that the 1099R was issued indicating an amount of disribution but nothing was taxed or the 1099 said a distribution was made and nothing is taxable (as if the distribution was after tax or Roth money)

[DMcGovern]

that all sounds fine, though I am a bit shaky on the 'zero amount taxable'

was it that the 1099R was issued indicating an amount of disribution but nothing was taxed or the 1099 said a distribution was made and nothing is taxable (as if the distribution was after tax or Roth money)

The second plan would need to issue a 1099R to report the distribution, but the taxable amount would be zero since the first plan already issued that amended 1099R reporting the amount as taxable. If both plans issued 1099R's as taxable, the individual would have to report it as income and pay taxes on it twice.

[Tom Poje]

ok, I didn't realize from the discussion that anything had been taxed.

Its hard to run ADP tests, and other stuff on my desk and keep up on these threads sometimes.

[Gilmore]

Just ran into the same situation, involving a rollover to an IRA.

One clarification on the great information already discussed:

Is it possible for the HCE to leave the taxable portion in the IRA as a non-deductible contribution, assuming no other IRA contributions were made for the tax year, and the Custodian permits non-deductible contributions?

Thanks!

[austin3515]

No - it was ineligible for rollover.

[DMcGovern]

Just ran into the same situation, involving a rollover to an IRA.

One clarification on the great information already discussed:

Is it possible for the HCE to leave the taxable portion in the IRA as a non-deductible contribution, assuming no other IRA contributions were made for the tax year, and the Custodian permits non-deductible contributions?

Thanks!

I think that was the discussion in the link Tom provided in post #2. It was not fully resolved, unless the client wants to obtain a PLR

[Lou S.]

Just ran into the same situation, involving a rollover to an IRA.

One clarification on the great information already discussed:

Is it possible for the HCE to leave the taxable portion in the IRA as a non-deductible contribution, assuming no other IRA contributions were made for the tax year, and the Custodian permits non-deductible contributions?

Thanks!

No - it was ineligible for rollover.

Austin, as long as the refund isn't more than the IRA limit, there is nothing wrong with leaving it in the IRA as a non-deductible IRA contribution.