Failed 401(k) Test and Rollover

[52626]

I have a client and they failed the ADP test for 12/31/2012. When the TPA calcuated the refunds, they noted one HCE terminated in 2012 and rolled his account balance to an IRA.

In addition to the refunds, there were match funds attributable to the refund that needed to be forfeited

1. Doesn't the IRA need to return the match attributable to the refund to the plan? Otherwise he recevied a higher match than the NHCEs

2. Doesn't someone need to tell the IRA custodian to much was rolled into the IRA. The refund portion is not eligible for rollover, and needs to be distributed to the participant?

TPA has done nothing for 8 months. The client pays for TPA work but it seems this TPA could not be bothered to correct an issue that occured on their watch.

Thanks

[Lou S.]

The Trustee should request return of the amount that was supposed to be forefited from the participant.

The Plan Administartor should inform the participant of the amount that was supposed to be refund and is not eligible for rollover along with the consequenses of leaving it in the IRA.

The particiant should be issued correted 1099-Rs if distribution in 2012 (or should receive 2 1099-Rs in 2013), see instructions to Form 1099-R there is a good section on exactly what to do when amounts are rolled over and later determined to be corrective distributions.

TPA has not actually made any error. This can potentially happen anytime a client pays HCE employes before all testing is completed, though it might be required following the terms of the Plan Document. I wouldn't expect this correction to be covered for free by the TPA as there is a fair amount of work involved in fixing this issue and while it happens from time to time I wouldn't say it is a common issue that falls under normal and routine work.

[BG5150]

Depending on what the TPA was engaged to do, they might not be in a position to make any corrections. It's their duty to inform the company of the issue. As Lou said, the Trustee and Plan Administrator have the responsibility to inform the participant, who in turn has the responsibility to inform his IRA provider.

The TPA may or may not be doing the 1099-Rs. As mentioned above, proper 1099's will need to be done from the plan's end. That will either involve the TPA or the asset carrier.

A good TPA (like me!) would monitor the situation occasionally, reminding the Administrator and/or Trustee of what needs to be done. Perhaps even help draft the letter to the participant and maybe notify the asset carrier of what happened. But, once the ball is in the Administrator's court, it is up to them to make sure it's done.

it seems like the TPA did its job (with the exception of some follow-up) so far. What was the client expecting?