ADP Refund

[Guest Melissa Winslow]

I have a DC plan that terminated 12/31/99. The owner rolled his balance over into an IRA in early 2000 before the year-end testing could be completed.

The plan has failed the ADP test. What are the requirements/filing issues for refunding dollars that are no longer in the plan?

Any citations would be appreciated.

[Guest Rick Butler]

The employer should notify the employee and the rollover vehicle that the excess amount was not an eligible rollover distribution. Rev. Proc. 99-31 kind of glosses over it. It also can be found in the regs to §401(k), I am not exactly sure where.

[david rigby]

No expert I, but isn't there another resolution to failing the ADP test? That is, could the test be passed by giving NHCE's more?

[Richard Anderson]

If the plan administrator wants to correct the failed ADP test by distributing excess contributions to an HCE that has received a previous distribution of his or her total account balance, the plan administrator may do so.

Two 1099's should be issued for the one distribution from the plan's trust. One 1099 will show a taxable distribution for the amount of the excess contribution, plus earnings. If this was a calendar year plan, the 1099 for the excess, plus earnings will be taxable in 1999 if the distribution occurred by March 15, 2000. If the distribution occurred after March, 15, 2000 the excess and earnings are taxable in 2000, and the employer must file Form 5330 to pay the 10% excise tax on the excess contribution as required under IRC 4979.

The other 1099 will be a non-taxable rollover of the remainder of the amount that was distributed.

The plan administrator should instruct the IRA custodian to refund the amount of the excess contribution, plus earnings; as this amount was not an eligible rollover distribution. The IRA should not issue a 1099 for the withdrawal of the excess contribution, plus earnings.

[This message has been edited by Richard Anderson (edited 06-03-2000).]