Plan Termination

[Nassau]

Is non-discrimination testing required for the final plan year when a plan is terminating? I'm not sure what value there would be in doing that since there are no assets to distribute excesses even if they failed.

[ESOP Guy]

I am assuming you are talking about ADP/ACP testing.

The excess can't be put into an IRA. So if the testing fails and refunds are called for the HCEs would have to get that money out of their IRAs.

[Nassau]

Yes, I am referring to ACP/ADP Testing. Is non-discrimination testing required for the final plan year when a plan is terminating (i.e., no assets in the plan currently) ?

[BG5150]

yes, testing is required.

[ESOP Guy]

And like I said if the ADP/ACP test fails and refunds are needed those people put their money in an IRA the amount of the refund would have to come out of the IRA.

It has been many years since I had that happen with a plan termination , but I recall it was a pain because the IRA people didn't want to send the money out of the IRA without sending a 1099-R. And of course they were not going to put a code on that 1099-R saying the reason for the distribution was testing failure.

[Lou S.]

The instructions to Form 1099-R pretty clearly state how you handle an excess contribution that was already rolled to an IRA and how to report it on two separate 1099-Rs.

And yes the excess must be removed from the IRA, unless the IRA owner is depositing it to the IRA as an IRA contribution and not a rollover from a qualified Plan.

And to echo others, yes all nondiscrimination testing is required in the year of plan termination.

[Tom Poje]

there is a strange rule under 1.401(k)-2(b)(v)

.......in the event of a complete termination of the plan...ih the entire balance of the HCE is distributed prior to when the plan makes a distribution of excess contribution...the distribution is deemed to have been a corrective distribution...to the extent that a corrective distribution would otherwise have been required.

[Lou S.]

See page 6 of 1099-R instructions

http://www.irs.gov/pub/irs-pdf/i1099r.pdf

Failing the ADP or ACP Test After a Total Distribution

[Tom Poje]

but is that referring to an individual with a total distribution but the plan is still on-going or a plan that had total distributions?

(otherwise what is the one paragraph even in the regs?)

I'm not perhaps disagreeing with you, perhaps the paragraph is poorly worded using the terms 'deemed' and 'otherwise have been required'

[ESOP Guy]

Lou/ others:

I am probably flirting with beating the dead horse here, but I am being misunderstood. (Sorry if in fact I have crossed the line and the poor dead horse is being beaten. I thought I was being helpful, but clearly I failed in that regard.)

Simple example:

HCE A rolled an $100,000 distribution upon plan termination of ABC 401(k) into an IRA at Really Big Brokerage House (RBBH). He first got a 1099-R reflecting that fact.

Now it has been determined that A should have gotten a $1,000 refund from the plan because of an ADP failure.

As Lou points out ABC 401(k) needs to reissue the 1099-Rs per the instructions he is talking about.

That is the easy part.

A wants or needs to get the $1,000 out of the IRA. So he asks RBBH to issue him a check for $1,000. RBBH is going to want to issue A a 1099-R because money is leaving the IRA. So A will end up with 2 1099-Rs for the same 1,000. One from the 401(k) plan and one from the IRA and he should not be taxed twice on the same money. And I have found it is next to impossible to get the brokerage house to issue the check without a 1099-R being issues.

[Lou S.]

I agree that it is next to impossible to get the IRA custodian to code it correctly so that it doesn't look like same $1,000 is taxed twice. I think the best a participant can ususally hope for is to get the cash from the IRA and claim the IRA distribution as return of basis on the 1040 when the IRA does send a 1099-R showing taxable income and keep execllent documentation in the event of future IRS audit. I am not a CPA but perhaps attaching an explaination to the original 1040 wouldn't be a bad idea either.

edit - don't most IRAs have some procedures for returning excess IRA contributions? I would imagine that many participants screw up and send too much in with at least some frequency and there must be some procedure to pull out those funds since if I'm not mistaken if t hey aren't withdrawn the IRA holder gets hit with a 6% (or is 10%) excise tax for each year those funds remain. I don't work directly with IRA and haven't personally had this experience but that is where I would at least start with RBBH

[MarZDoates]

there is a strange rule under 1.401(k)-2(b)(v)

.......in the event of a complete termination of the plan...ih the entire balance of the HCE is distributed prior to when the plan makes a distribution of excess contribution...the distribution is deemed to have been a corrective distribution...to the extent that a corrective distribution would otherwise have been required.

Tom, does this mean that the entire distribution is considered to be a refund of excess deferral? Or just the portion that should have been refunded to pass the ADP test?

[ETA Consulting LLC]

"To the extent that a corrective distribution would otherwise have been required" means just the portion that should have been refunded under the failed test.

Good Luck!

[MarZDoates]

Thanks.

The material I read (not the actual reg), left out the "to the extent..." part.

What I read originally sounded like the entire distribution would be considered a refund of excess. Thought that sounded pretty darned harsh!!!