incorrect testing

[K2retire]

We are the advisor on a bundled plan whose ADP/ACP testing was done incorrectly. The client questioned it and eventually was told that any further questions would result in a $200 per hour fee to answer. Then they came to us for assistance.

The explanation I received from from the provider when I was unable to duplicate their results was that the difference related to orphan match due to the ADP test refunds. According to my calculations, both of the people receiving ADP refunds had sufficient remaining deferrals to justify the full match remaining in their accounts.

When pressed for an explanation, I was told that because the plan requires a match per pay period and they refund the most recent deferrals first, the match associated with those pay periods must be forfeited. I had never heard of doing it that way, and told them so (hoping my ASPPA designations would carry at least some weight). They responded saying that they had never heard of refunding unmatched deferrals first as I suggested and they didn't believe it would be allowed.

A brief review of their basic plan document revealed language requiring that unmatched deferrals be refunded first. I referred them to that language and asked that the tests be corrected. In response, I was told that they would look into it.

Ignoring the language in this document, has anyone ever heard of refunding based on LIFO as a basis for determining orphan match to be forfeited?

How long would you wait for an answer?

[ETA Consulting LLC]

At the end of the day, "Matching contributions are not treated as forfeitable merely because the contributions to which they relate are excess employee contributions, excess aggregate contributions, or excess deferrals". You are not forfeiting match merely because of an ADP failure, but to correct a discriminatory rate of match after all corrective distributions have been made.

The document "may" prescribe a forfeit of attributable match prior to the ACP test, but even that would not appear as an authority to forfeit on the first payrolls.

So, to prove your case another way, I'd challenge them to show me where match is to be forfeited merely due to ADP failure. If that language isn't there, then they have no basis for forfeiting the match; as they would be hard-press to prove there remains a discriminatory rate of match after the ADP refund.

Just more fuel for your fire :-)

Good Luck!

[BG5150]

We are the advisor on a bundled plan whose ADP/ACP testing was done incorrectly. The client questioned it and eventually was told that any further questions would result in a $200 per hour fee to answer.

So, I pay you $2,000 a year to do a job for me and you are going to charge me $200/hr more to explain it to me?

Not a very client-friendly business model.

[K2retire]

We are the advisor on a bundled plan whose ADP/ACP testing was done incorrectly. The client questioned it and eventually was told that any further questions would result in a $200 per hour fee to answer.

So, I pay you $2,000 a year to do a job for me and you are going to charge me $200/hr more to explain it to me?

Not a very client-friendly business model.

I suspect they are paying far less than that as this particular service provider is known for being low cost (and low service). Based on this issue we're hoping to persuade them to move the plan.

[K2retire]

Participant deferred 15% until reaching 402(g) limit. Match formula is 100% of deferrals up to 5% of pay. ADP refund can easily be made without reducing any single pay period to below 5% of pay.

After pointing out the document language that says to refund unmatched deferrals first for an ADP failure, this is the response we received from the record keeper about why they believe they are correct.

Testing was done using the compensation associated with the deferrals. Any compensation were there was not a deferral present cannot be used to calculate match. This is why we have maintained that you cannot use the annual compensation to qualify the Match contributions. If you calculate using the payroll by payroll information you were provided you will see that based on the pay periods there deferral was taken from the employees pay, they were matched at 5%. Only when you use compensation not associated with a deferral will the calculation show that the match came in an less than 5%. The testing was calculated correct due to the IRS guidelines.

[rcline46]

I have been doing ADP/ACP testing since 1983, yes 1983. I have never heard of such B.S. on ADP failures. No matter how the match was determined (and deferral), it must be tested on annual pay. When you match per pay and no true up, it is almost always under the ideal match.

So they have two problems - one is testing definition of compensation, and the second is identifying the regulation that supports using only pay while deferring and not pay while eligible to defer. Note that exceeding a 415 or 402(g) limit does not disqualify pay, only exceeding the 401(a)(17 limit.

[Mike Preston]

What Reed said!