Collective Bargained Plan and ADP refund

[buckaroo]

I have a collectively bargained plan that fails the ADP test. Rather than issuing corrective distribution checks, the plan sponsor has asked that the corrective distributions be reclassified as employee after-tax contributions. The plan document allows for this and PS understands that the participants will still get taxed on the corrective distributions. Based on the fact that the plan is a collectively bargained plan, it is deemed to satisfy the ACP test (401(m)-1(b)(2)). Therefore, reclassifying the corrective distributions to after-tax employee contributions will not adversely affect any non-discrimination testing. Does anyone disagree with this thought process?

Appreciate your responses in advance.

[ETA Consulting LLC]

I agree, but you should ensure you follow the specific terms of the plan when reclassifying these amounts. If I'm not mistaken, the Regulations on this requires that it is done within the first 2-1/2 months after the plan year end (that is being tested). The reclassification is deemed to happen on the date the notices is provided to the HCEs that the reclassification was done.

These amounts continue to remain in the 401(k) account and subject to the withdrawal restrictions, but they merely create a post-tax basis in that source. You should ensure you keep 'all your ducks in a row when doing this'. It's a procedure I really had seen since the late 90's :-)

Good Luck!

[BG5150]

How does money that wasn't taxed get post-tax basis? Do they issue a 1099 for the amount?

[John Feldt ERPA CPC QPA]

sorry - wrong post - removed!

[ETA Consulting LLC]

How does money that wasn't taxed get post-tax basis? Do they issue a 1099 for the amount?

Yes. When the amount is reclassified as an employee after-tax contribution, then a 1099R is issued and those amounts are subject to the ACP test (if applicable). All this does is create a post-tax basis in the 401(k) Deferral account. The withdrawal restrictions would remain (so it's not treated as employee after-tax contributions for withdrawal availability).

It's my understanding that this must be done within 2-1/2 months after the year ended. So, if you're testing the plan year ended December 31, 2015, then it would not be an option today.

Good Luck!

[BG5150]

Thanks, ETA. It's been so long since I've worked with a plan that allowed after tax that I forgot the procedure for reclassifying the amount as after tax.