Failed ACP test correction after 1 year: questions

[BG5150]

Ihave a plan that failed ACP for 12/31/14 and never did refunds. So, now we are in SCP and have two options: QNEC to fix test or refunds and a 1-to-1 QNEC in the amount of the refunds. My questions:

EPCRS says: For purposes of this section .03, employees who would have received a matching contribution had they made elective deferrals must be counted as eligible employees for the ACP test, and the plan must satisfy the ACP test.

Does that mean all eligible people in the ACP test gets the QNEC? Or can I limit it to just the people who had match?

If a plan chooses to do ACP refunds and a 1-to-1 QNEC, is there still an excise tax due because of the late distribution of the refunds? This is a 12/31/14 PYE.

And same question: does the QNEC go to all eligibles under ACP, or only the deferrers? (I think I made that last word up)

[Tom Poje]

if you are using 1-1 QNEC your quoted cite makes no sense as it says the plan must pass the ACP test. I would be surprised if that ever happened under 1-1 correction.
so you cite comes from a non 1-1 correction method (e.g. making a QNEC to all eligible ees)
you quoted from Appendix A

Appendix B contains the 1-1 language.

Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees
furthermore there are 4 different possibilities
The contribution made under paragraph (1)(b)(iv)(A) is allocated to the account balances of those individuals who were either
(I) the eligible employees for the year of the failure who were nonhighly compensated employees for that year or
(II) the eligible employees for the year of the failure who were nonhighly compensated employees for that year and who also are nonhighly compensated employees for the year of correction.
Alternatively, the contribution is allocated to account balances of eligible employees described in (I) or (II) of the preceding sentence, except that the allocation is made only to the account balances of those employees who are
employees on a date during the year of the correction that is no later than the date of correction. Regardless of which of these four options (described in the two preceding sentences) the Plan Sponsor selects,
eligible employees must receive a uniform allocation (as a percentage of compensation) of the contribution. (See Examples 1 and 2.) Under the one-to-one correction method, the amount allocated to the account balance of an employee (i.e., the employee's share of the total amount contributed under paragraph (1)(b)(iv)(A)) is not further adjusted for Earnings and is treated as an annual addition under § 415 for the year of the failure for the employee for whom it is allocated.

............

since it is referred to as a QNEC, I don't see how you can treat it as a QMAC and provide it only to those deferring. (But then I still have the Grinch in me leftover from Christmas!)

[BG5150]

Tom, in Appendix B 2.01(b), it starts:

(b) One-to-One Correction Method. (i) General. In addition to the correction method in Appendix A, a failure to satisfy the ADP test or ACP test may be corrected by using the one-to-one correction method set forth in this section 2.01(1)(b).

So, this 1-to-1 can be used for the ACP test.

[Belgarath]

BG - my reading and understanding is that you must give to all eligible NHC - you can't give it just to those who deferred.

[Tom Poje]

BG- I'm not saying you can't use 1-1 to correct a failed ACP test, simply saying that your cite makes no sense in regard to a 1-1 correcting (since it talks about having to pass the ACP test after the correction)

sorry for the confusion.

[BG5150]

BG - my reading and understanding is that you must give to all eligible NHC - you can't give it just to those who deferred.

So, basically, if the plan fails ACP and it's not corrected in one year, ALL NHCE's eligible will have to get something? Often, this will lead to having to open up several to dozens to maybe hundreds of accounts with tiny balances.

That seems a somewhat Draconian punishment.

(Side note, I just found out that the test eventually passed using the shifting method, so in THIS case, I'm ok. But the knowledge of how to correct ina future case might be handy.)

And, Tom, I always thought that QNECs could be used in the ACP test. They just can't do "double duty," same dollars used for ADP and ACP. (Providing the doc allows for it.)

[Tom Poje]

the only problem I have with your statement is you wanted to provide it only to those who deferred, at that point I would say you have a QMAC rather than a QNEC

Even when providing a QNEC to selected employees (aside from 1-1 correction)

you are someone limited, at least as far as I have seen in document.

something like starting with the lowest paid or something like that.

[BG5150]

I'm with you, Tom. That's kinda why I asked my question. It seems silly that the only way to fix a failed ACP test is to give something to EVERYONE.

(Well, I guess it's no so silly if you think that everyone would something if they failed ADP--same # of people involved in both cases whether it's all or just those who defer)

[Belgarath]

"So, basically, if the plan fails ACP and it's not corrected in one year, ALL NHCE's eligible will have to get something? Often, this will lead to having to open up several to dozens to maybe hundreds of accounts with tiny balances.

That seems a somewhat Draconian punishment."

BG - I don't disagree, I just think that's what the correction in the Appendix requires.

You can always actually submit through VCP to see if you can get the IRS to agree to giving only to people who deferred, but I don't like your chances, and the time and expense seem hardly worth it, even with the new reduced fees. However, I've heard anecdotally that the IRS has been pretty reasonable to work with on some of these VCP situations, so you never know...

[BG5150]

Fortunately, for now, I don't ahve that problem Test passes using shifting method.