Excise tax for failed ADP test

[Guest mo]

We are taking over a plan from another firm, where the other firm completed ADP/ACP testing for the year ended 12/31/99. However, instructions to issue refunds weren't provided until after 3/15, so the 10% excise tax applies. This other firm (the local office of a national firm) insists they have official guidance (I assume from IRS or DOL) that the excise tax applies only to the allocable income and not to the returned contributions themselves. Anyone ever hear of such a thing? What advice would you give the client relative to their reliance on this advice?

[MWeddell]

Chances are there is communication gap somewhere, between the other firm and the client or between the client and you. Of course, it's possible that the other firm is giving out the wrong answer too!

Code Section 4979(a) clearly puts the 10% excise tax on the excess contributions and excess aggregate contributions, not on any investment gains or losses. This is the opposite of what the client says another consultant is claiming.

[Guest mo]

Unfortunately, no miscommunication. The other firm sent out a letter (of which I have a copy) indicating that the excise tax applies to the allocable income only and attaching a 5330 prepared on this basis.

Thanks for the sanity check.