Correction or corrective distribution when matching contribution not y

[John A]

What is the proper procedure for making corrective distributions when match contribution has not yet been deposited? An employer has decided to make a discretionary matching contribution, and the match formula is defined in the plan document. The employer is planning on depositing the matching contribution after March 15. The ADP test fails and will be corrected through corrective distributions of deferrals. There will be "hanging match" associated with the deferrals. The employer would like to refund the hanging match before March 15. A few questions: 1) Can we safely assume that no earnings will be involved since the match has not yet been deposited? 2) Is it possible to make the actual deposit of match net out the hanging match, so that the hanging match portion is never deposited? 3) Can the employer refund the hanging match from current match account balances before April 15, even though the match involved in the calculation has not yet been deposited?

[Disco Stu]

I'm not familiar with the term "hanging match." If you are referring to match attributable to salary deferrals refunded due to an ADP failure, then that match cannot be refunded, it must be forfeited.

I share a problem similar to the second part of your qeustion though. The plan I'm working with deposits the matching contributions annaully, after the close of the plan year. If ACP refunds are to be made, it doesn't seem logical to include income on the match.

I'm concerned, because the answers to such questions are not always logical. Does anyone have any guidance that they could point me to?

[Fredman]

Disco,

Here's what I have (thanks to Sal Tripodi's ERISA Outline Book)...

You must return any allocable earnings along with the excess. Allocable earnings means the net gain or loss for the plan year attributed to the excess. You may also have to return gap earnings only if required by the Plan document. You can use any reasonable method to calculate the allocable earnings and if you can't afford a reasonable method you can use the one appointed to you in section 401(k)-1(f)(4)(ii).

I haven't used/looked at the formula provided in the regs, but I think its clear that there are no allocable earnings for the excess contributions you mention. I would think that its safe to distribute the excess only.

I haven't heard of a "hanging match" so I can't comment.

[Guest]

I would agree on the argument on the earnings on the match. I think you could throw a 'first year' scenario in front of their face. How much match earnings are there in a plan the first year if match made after end of year. ZIP, end discussion.

on the other hand, if plan fails and I had to return $100 in deferrals, and the receivable for deferral was 200, the govt still says tough - figure earnings over the whole year, so who really knows.

I also agree that, based on your comment, the match would have to be forfeited. It sounds like you said the ACP test passes, and the match refund is due to related deferrals. so be careful!

[Disco Stu]

Regarding the forfeitures...it seems to me that you would have to go ahead and put them into the plan. Especially if the plan reallocates all of the forfeitures. It the plan used these forfeitures to offset future contributions or expenses, you might have a better arguement for not contributing them initially.

[John A]

Thank you all for the reminder. I'm not sure what I was thinking. The ACP test does pass and the match does have to be forfeited, not distributed. The match that has to be forfeited is the match associated with corrective distributions (deferrals returned due to the ADP test failure). The plan is a daily valued plan, and I believe the real question, other than the earnings question, is if the forfeitures can be released from current match balances prior to the discretionary contribution being deposited. (I have restated the question on the Daily valuation board.)