Failed ADP Test

[Guest Theresa Irvin]

Have a plan that ended in 06/30/2010 that has a failed ADP test, excess deferrals were not distributed. What are the remaining options for corrections since they are beyond 2 1/2 month time frame?

[QNPG]

Have a plan that ended in 06/30/2010 that has a failed ADP test, excess deferrals were not distributed. What are the remaining options for corrections since they are beyond 2 1/2 month time frame?

If the excess contributions or excess aggregate contributions are distributed after the first 2½ months of the correction period, the amount includible in income is taxable for the year in which the distribution is made. See Treas. Reg. §1.401(k)-2(b)(2)(vi)(A) and §1.401(m)-2(b)(2)(vi)(A). No difference for noncalendar year plans. When this tax rule applies, there is no special calculation for noncalendar year plans as there is for corrective distributions made in the first 2½ months of the correction period.

The regulations prescribe a "leveling" method to determine which HCEs have excess contributions. The leveling method involves a two-step process for determine that amount to be distributed to each HCE who is an eligible employee for the plan year that the ADP failure occurred. This leveling method is explained in IRS Notice 97-2 and in Treas. Reg. §1.401(k)-2(b)(ii) and (iii).

[K2retire]

Because the correction was not made within 2 1/2 months, the company will be subject to a 10% exise tax.

[12AX7]

I think somehow the original question has not been answered in full. The plan must correct excess contributions by either distributing the excess by the end of the current plan year, or the company makes a full QNEC. I go along with the 10% penalty at this point if the distribution is made. I assume the testing has been done correctly and the amounts in question are really not excess deferrals (in excess of the 402(g) limit for the year. These are very basic testing procedures, so please check with individual(s) that work on the compliance aspects of the plan for further techinical consulting.

[Guest Theresa Irvin]

You are correct these are just testing limits not limits in excess of 402g.