Failed ADP/ACP: Employer Puttiing Bulk of Matching In Forfeiture Acct...

[401kquestion]

My employer failed their ADP/ACP Test for 2013 in our 401K plan. I have been after our owner to Safe Harbor the plan for the past few years, as I've gotten money back each of the last few years due to failed ADP tests, but he doesn't want to put the extra money into the plan to Safe Harbor it. As a result, the past few years I've gotten a check back for excess contributions.

The owner and I are the only HCE's in the organization currently. Most of our organization doesn't contribute at all to our plan (we have about 50 employees total) and those who do invest a small amount.

My employer ended up matching over $10,000 to my 401K last year but because the ACP test was failed, I'm being told by our plan administrator that more than $8,000 of the matching (and $1,900 in gains) are in excess of the average contribution and are being put in a forfeiture account, which my owner will use to fund the 401K plan for this year (fees and funds). Our plan administrator's response is that this money never should have been put into my account since we failed the ACP Test.

I am essentially having more than $10,000 taken out of my 401K with nothing to show for it. Should I accept the logic our my plan administrator? He's trying to tell me that most companies he deals with have ADP/ACP issues and that HCE's are always having this same problem, yet a good friend of mine who runs a similarly sized business (50 employees) told me that he simply just Safe Harbors his plan to avoid upsetting employees. The plan administrator's response is that I should just do something like an annuity since we're always going to have this 401K issue (feels like he's just trying to sell me something).

I talked to my boss again about my concerns and he doesn't plan on Safe Harboring the plan any time soon. I'm having to cut my 401K contribution to about 4% now so we don't fail the ADP/ACP test again next year, so instead of maxing out at $17,500 each year, my contribution will have to be much less. I already max out on IRA's for my wife and myself and also have taxable accounts for stocks and mutual funds, but am wondering at what point I need to look for a company who doesn't have these ongoing issues.

Would appreciate any insight from others who run into this issue or who understand it from a planning point of view.

[K2retire]

The failed test is a common problem. If the plan is already providing a match, depending on the formula already in place, it might not cost any more to make it a safe harbor match instead. But it is a required match that must be fully vested, so in that way it could end up costing more.

Your match should only be forfeited to the extent it is not vested. Any vested match should be distributed to you along with your deferrals.

[401kquestion]

Thank you for the response. In my Retirement Account online, I have both "source balance" and "vested balance" listed. The source balance and vested balance amount are exactly the same for employer matching, as they are also the same for rollover and employee pre tax.

I have been told by our plan's administrator that it essentially doesn't matter if the employer matching from last year is showing as "vested balanced" because since the ACP Test was failed, this additional $8,300 should never have been matched in the first place and is going into the forfeiture account. My owner believes the same.

I am getting a check for what I overinvested last year, plus gains, but the plan administrator is asking me to sign a document that also includes me sending back $10,200 for a failed ACP test/excessive contribution on the employer matching that is going into the forfeiture account.

I did look on my plan highlights page and it says regarding employer matching for vesting the following:

Employer Match Contributions:
1 year of service 0% 2 years of service 20% 3 years of service 40% 4 years of service 60% 5 years of service 80% 6 years of service 100%

I've been with this company for 12 years. Does the above mean that the employer match doesn't vest for a specific year (like 2013) until 2015 (which would then only be at 20%)? Or since I've been with the company a dozen years am I automatically vested 100%?

Any additional insight into this type of situation and how I should handle it would be greatly appreciated.

[K2retire]

My first answer was not as complete as it should have been. If the match overage is due to a failed ACP test, it should be paid to you. If the match overage is because, now that you've gotten deferrals back there isn't as much to match, it would be forfeited. That may be what they mean by "it never should have been matched in the first place.

[401king]

Safe Harbor is too big a commitment for many employers. It also adds restrictions to the plan, making it less flexible in other ways. I can see your employer's point of view in not wanting to risk an extra 4% "raise" for each of the employees, just so that a couple could maximize their deferrals.

It may not be your role, but you're better off encouraging the employees to start saving. Or ask the TPA if they can host an enrollment meeting to educate the employees.

If the company offers a match and employees are not saving it may be an issue of communication.

[Lou S.]

My first answer was not as complete as it should have been. If the match overage is due to a failed ACP test, it should be paid to you. If the match overage is because, now that you've gotten deferrals back there isn't as much to match, it would be forfeited. That may be what they mean by "it never should have been matched in the first place.

^This.

That is if the match was "related to deferrals that were refunded" then the match very likely needs to be forfeited under the terms of the document.

If your employer won't do a safe-harbor, ask him if he'd consider automatic enrollment (sometimes called negative elections). It won't end refunds but it might reduce them if enough folks fail to turn in a 0% election form and get defaulted in at 3, 4 or 5% of pay.

[masteff]

but am wondering at what point I need to look for a company who doesn't have these ongoing issues.

One question for you personally to consider is what assumptions you made in originally taking that job? Did you include those several thousand dollars as part of your total compensation?

As to other companies no having the same issue... as others have said, it's really not that uncommon. Frankly, an ADP/ACP refund is not that big of a deal. Personally, I'd rather over contribution by a couple percent and get a refund than to put in less than was possible.

Since he won't go for a safe harbor, what about asking the owner to make up the lost matching in the form of a bonus? A bonus isn't tax deferred like it would be in the 401(k), but at the end of the day, it's cash. I wouldn't hold out for every last penny you lost; the key is bringing your total compensation closer to what you expect versus some other job you could go find.