Excluded HCE Defer, Refund Effect

[The 402"(G)"]

A plan excludes HCEs from contributing, however an HCE was accidentally allowed to contribute.

Mostly due to outside factors, we are changing the plan to a MEP effective July 1st, 2016. The plan currently is a calendar year plan.

In trying to find the best way to fix the HCE with this change, the numbers below apply:

1/1 to 6/30 comp = 100,000

7/1 to 12/31 comp = 100,000

1/1 to 5/20 401(k) contributed = 9,000

HCE intends to max out to 18,000 (under 50)

Our plan was to immediately stop contributions, refund the 9,000 so that the net 401k contribution for the first half of the year is 0. Then the first pay after 7/1 will have 9,000 withheld to make him whole. Then the remaining pays are held per the 9% deferral rate, giving him an additional 9,000 and getting him exactly to the limit of 18,000.

My question is how to treat the refund in regards to the 18,000 limit. Does the refund count towards reducing the contributions for the 402(g) limits? (as in the proposed situation above?) Or as of 7/1 would the HCE still have 9,000 contributed towards that limit? If this were the case, it would lead to meeting the 402(g) limit immediately after we did the 9,000 contribution on the first payroll after July 1st to make him whole. He then would be unable to contribute anything else after July 1st

Thank you

[Mike Preston]

I agree with the self-correction of refunding the $9,000.

After that, everything kind of breaks down because I think you are thinking that because the plan will become a MEP on 7/1/2016 that will somehow change this participant from an HCE to an NHCE. I'd have to double check but I thought the definition of an HCE in a MEP is that if you would be an HCE if the plan were a single employer plan you continue to be an HCE if the plan is a MEP.

That is, if you are a participant in a MEP and are an HCE with respect to ANY adopting employer you are an HCE as far as the plan goes.

[The 402"(G)"]

I agree with the self-correction of refunding the $9,000.

After that, everything kind of breaks down because I think you are thinking that because the plan will become a MEP on 7/1/2016 that will somehow change this participant from an HCE to an NHCE. I'd have to double check but I thought the definition of an HCE in a MEP is that if you would be an HCE if the plan were a single employer plan you continue to be an HCE if the plan is a MEP.

That is, if you are a participant in a MEP and are an HCE with respect to ANY adopting employer you are an HCE as far as the plan goes.

Thank you for the response, I wanted to jump in really quick on the HCE issue. We fully intend to keep that person an HCE, as part of the change we are just re-writing the document to allow them to contribute. Our issue is basically the best way to allow them to remain whole with the refund - our fear being hitting that limit.

[austin3515]

He had no 401k contributions. Those were ineligible contributions, so they do not count towards 402g. You should adjust it off of payroll so it doesn't show on his W-2.