Late ADP failure correction - earnings

[AlbanyConsultant]

Maybe because it's Friday, but I can't nail this down:

I've got a plan that we have just determined failed the 2010 ADP test. I know that they have to refund and then allocate a QNEC for the same amount. How do the earnings fit into this?

1. Are earnings on the refunds calculated through the end of the 2011 plan year, or throught a reasonable estimate of the date of distribution?

2. Is the allocation equivalent to the base amount, or are the earnings also counted?

Thanks!

[BG5150]

(And by the way, they do not HAVE to do distributions and a 1-to-1. A straight QNEC can be done as well, though oftentimes it's more expensive. Even if it is a prior-year tested plan. Appendix A of EPCRS has the straight QNEC correction, and Appendix B describes the 1-to-1 method.)

[fiona1]

I have to disagree with BG5150 on this one. Section 2.01(1)(b)(iii) of Revenue Procedure 2008-50 says that "the portion of the excess contribution amount assigned to a particular highly compensated employee...is adjusted for earnings from the end of the plan year of the year of the failure through the date of correction."

And Section 2.01(1)(b)(iv) says that "the employer makes a contribution to the plan that is equal to the aggregate amounts distributed and forfeited under paragraph (1)(b)(iii)(A) (i.e., the excess contribution amount adjusted for earnings, as provided in paragraph (1)(b)(iii)(A)).

I agree that if the refund was made timely (within 12 months after plan year end), then no GAP earnings apply. But a 1:1 refund must include earnings to the date of correction.

Sal Tripodi notes this in Chapter 15 of the ERISA Outline Book as well:

Earnings after the close of the plan year for which the ADP/ACP failure occurred through the time of the corrective distribution is commonly referred to as the “gap period.” In pre-2006 plan years, a plan did not have to distribute gap period earnings unless the plan specifically provided for the “gap period” earnings to be distributed and for post-2007 plan years, also does not have to distribute gap period earnings because of legislative amendments adopted by the PPA 2006. However, when the corrective distributions are being made under the one-to-one correction period, gap period earnings must be distributed, regardless of the plan year to which the correction relates.

[BG5150]

I have to disagree with BG5150 on this one.

You're right. 'Twas Friday, and I was was looking forward to the weekend, I guess.

I have amended my original post...