Failed ACP refund - forfeiture or refund?

[Santo Gold]

Plan failed their 2011 match-only ACP test (but not their ADP test). One HCE is affected. Do they receive a distribution of the excess or is the money treated as a forfeiture (individual is 100% vested).

Thanks

[ETA Consulting LLC]

Plan failed their 2011 match-only ACP test (but not their ADP test). One HCE is affected. Do they receive a distribution of the excess or is the money treated as a forfeiture (individual is 100% vested).

Thanks

They receive it (to the extent it is vested). They are entitled to the match as it is given pursuant to the plan's match formula. All the ACP does is test whether the match is allowed to remain in the plan.

Good Luck!

[Tom Poje]

I would add if the person is not 100% vested {at this time} it is still possible to distribution the entire excess aggregate contribution to the individual

see example 7 of 1.401(m)-2(b)(5)

[12AX7]

I would add that this is possible to the extent the Plan would permit this method of distribution. In the Plan Document I mostly use, the unvested portion, with adjustment for earnings, gets forfeited.

[imchipbrown]

I have an ADP and ACP that are failing. In the ACP test, the HCEs with the with the highest dollar amounts of match are not the same ones that need "fixing" to pass the ADP test. So, their excess contribution amounts are NOT due to refunds of deferrals. One has an amount of Excess Match due to failure to take the compensation limitation into account, plus some more due to test failure. I assume I can forfeit the "failure" amount. Of the remaining amounts, I need to adjust this HCE plus one other to equalize their matching dollar amounts. (Step 2 in the ACP test fix). My document follows the regulation below.

Treas. Reg. 1.401(m)-2(b)(2)(v)

Excess Matching Contributions and Voluntary Contributions shall be corrected in the following order:

• (i) Voluntary Contributions not taken into account in determining Matching Contributions under Article 4 shall be distributed;
• (ii) any other Voluntary Contributions not described in clause (i) shall be distributed and their related Matching Contributions shall be forfeited to the extent that additional Matching Contributions are not made pursuant to Treas. Reg. section 1.401(a)(4)-11(g)(3)(vii)(B); and
• (iii) vested Matching Contributions shall be distributed and nonvested Matching Contributions forfeited.

Amounts forfeited shall be used to restore forfeitures, reduce Company contributions (or reallocate as Company contributions) made pursuant to Article 4 or to pay Plan expenses.

If the Plan does not correct excess contributions within 2-1/2 months, or such other time frame as may be prescribed by the Secretary of the Treasury, after the close of the Plan Year for which the excess contributions are made, the Employer will be liable for a 10% excise tax on the amount of the excess contributions to the extent provided in Code section 4979

So, here's the "problem". My custodian of the funds (John Hancock) doesn't have an option on their excess withdrawal request form for refund to participants of employer contributions. They only allow forfeiture, which goes against the document. Or, and here's the big possibility, I'm missing something. Any help would be appreciated.

[12AX7]

JH forms do allow for the return of excess aggregate contributions, if that is what you are asking.

[imchipbrown]

Hi 12AX7

It is what I'm getting at, actually, If you know the magic words, I'd love to know them.

I reviewed the form GP1595us with a JH rep, and was told they couldn't return ER MAT sources to the Participant. It could go to the Trustee, but then they wouldn't do the 1099 reporting if the Trustee endorsed the check to the participant. I've asked for a written explanation from my rep.

(iii) above says Matching Contributions shall be distributed - guess it doesn't say to whom!

[BG5150]

I think someone is mistaking "return of ERMAT" to be unvested money. That can be paid back tot he trustee, though I don't really see why that would happen. It should go tot he cash account.

[imchipbrown]

BG5150,

So, you'd agree (with me, at least) that the vested ERMAT source should go back to the Participant? If so, do you use John Hancock? Do you have the magic words to get the refund to the Particiapnt?

[BG5150]

Chip, I certainly do agree.

We work with JH, but I haven't had an ACP failure in years, so I wouldn't know about their process re: the refunds.

[Spencer]

Chip, I'm having the same problem. JH refuses to refund Excess Aggregate Contributions to the participant. As you said, their form doesn't even allow for it. And my JH rep just advised they do not have a workaround. As the above poster mentioned, I haven't had an ACP failure prior to this one in years, so this is my first experience with JH and this issue.

I suppose our only option is refund to employer and employer refunds to participant.

[BG5150]

That's just ludicrous.

How did this never come up before?

Are you sure you are choosing the correct reason on the form? Excess contribution and not excess annual addition or excess deferral?

[chc93]

Maybe JH expects the plan to have a plan trust checking account in which such refunds can flow through (and still remain a plan asset). But also assuming that the company is the trustee, so JH writes a check to the plan trustee instead of the company? I don't recall if it was JH, but years ago I seem to recall a plan we had that had a separate plan trust checking account for such purposes.

[BG5150]

What does JH do for other distributions? Such as severance of employment?

One of the features of the service should be that JH does distributions and 1099's.

is this a JH Annuity product?

[imchipbrown]

OK Guys,

My JH representative had a powwow with a colleague of his and they came up with an explanation of the lameness of their form (GP1595US). They highlighted that Section 3 should be interpreted to mean "Excess deferral and excess annual addition withdrawals (Box 2 Withdrawal reasons)" of "employer money types cannot be refunded to the plan participant". But a (Box 2) "Excess Contribution Withdrawal" of Employer money types will be refunded to the participant.

Their Box 6 "Method of Payment" section also changed in that the "Pay to Participant" checkbox was removed. It's now implied, if no other box is checked. Really lame!

I've attached a screenshot of Hancock's replyfor what it's worth.

reply to inquiry.pdf

[Spencer]

Chip, that is how I originally prepared the form and they refused to process it.

[imchipbrown]

I've replied privately to Spencer with the name of my JH rep. Perhaps he/she will share the results with a follow-up.