Forfeiture of Matching Contributions Due to Failed ADP Test

[Guest Lentils]

I'm looking for definitive written authority for what is clear: a participant who received a deferral refund resulting from a failed ADP test does not get to keep the match attributable to the refunded deferrals.

I'm an investment advisor and not a TPA, so I don't have access to the ERISA Outline Book or other such resources. Hoping someone can help me "prove" what is clear to a participant who is skeptical because it's not covered in the SPD.

Thanks

[Lou S.]

It should be in the Plan Document. Possibly under the title "forfeiture of related match" or similar item.

[Lou S.]

There is some prior discussion here

http://benefitslink.com/boards/index.php?/topic/40654-timing-of-forfeiture-of-related-match-on-adp-corrective-conts/#.VGKOt8nYtKo

and

http://benefitslink.com/boards/index.php?/topic/9946-forfeiture-of-related-match-from-adp-test-failure/#.VGKO5MnYtKo

[Tom Poje]

I would point out, the regs say that the match 'may' be forfeited.

to some that means, I may forfeit it but I don't have to if I don't want to. bad interpretation of what the regs mean!

probably a better interpretation of 'may' in this case is that normally you have no reason to forfeit (e.g. suppose the person was 100% vested) but in this situation you go ahead and forfeit (otherwise you have a problem with rate of match, which would lead to plan disqualification.

[legort69]

Why is it discriminatory to test ADP, make corrections, AND then test ACP, make corrections, AND then determine whether you have a related match/forfeiture issue? If the HCE gets match money in cash for failing ACP versus money forfeited, then that is a better outcome for all, and a less stressful conversation to have than to run the ADP test and then forfeit the related match before running the ACP test with the match sans $ forfeit.

I've seen spouses of owners take 10k pay and contribute 8k and they skew the ADP/ACP rate and that in itself can create a related match forfeiture if you forfeit related match pre-ACP testing. Where is the justice in that?

Employers establish a match formula and want to retain top talent and they create a vesting schedule to satisfy the years of service in order to retain the talent. The match contribution is deemed to be a part of their benefit package. You forfeit the match so now the employer has to give a bonus to the employee on the W2 in order to rectify the forfeiture. I can't imagine a business owner reading the fine print on this, and i bet, if given the option to select the order, then they would consider the scenario of ACP test corrections prior to related match forfeiture.

Even Sal's ERISA Outline provides 2 approaches amongst the TPA community, but one approach is less evil than the other.

There, I had to get this off my chest.

[Tom Poje]

there is no reason you can't perform the ACP test first, and if it fails, distribute the match.

but if the ACP test does not fail it is simply a situation where that is not am option.

unfair? arguably yes, but how is that any more unfair than all the other options?

the HCE who (barely makes over the comp limit) causes the test to fail by deferring a higher % of pay but the refund goes to the HCE deferring the most?

or for that matter, since deferring is entirely optional, why is there ADP testing in the first place? no such thing exists with 403b plans

[legort69]

Thank you Tom. I have searched on this thread on BL and found there are a lot of qualified people who post about this topic and they use the word "MUST" when stating that the ATM forfeiture occurs before ACP. I have also seen ADP/ACP tests from large 401k outfits that use that same methodology. Granted I may not have read those plan provisions that outline the testing order, but my bet is that its not explicitly stated, or if it, then the document drafter is further removed from the administration of those provisions. I wish the guidelines would be less interpretive on this point. There is a material difference between forfeiting ATM and possibly receiving a refund of the match. (vested portion)..

[Tom Poje]

in The Coverage and Nondiscrimination Answer Book (12:90.1) I wrote it up as follows

There is no requirement that the ADP test be performed first, followed by forfeiture of related matching contributions if there were excess contributions (see Q 9:15). Both Treasury Regulations Sections 1.401(m)-2(b)(3)(v)(B) and 1.401(a)(4)-4(e)(3)(iii)(G) indicate that the rate of match is determined after any corrections are made. IRS officials also agreed with this conclusion. [Q and A #18, 2004 ASPPA Annual Conference] Thus, aside from any document restrictions, it is recommended to perform the ACP test first, make any corrections necessary, and then perform the ADP test. In this way the HCE might not forfeit any matching contributions.

of course, any comments made by IRS at such meetings do not necessarily reflect an actual Treasury Position, but the fact the regs specify related match is determined after any corrections seems to hold to this position