ACP Refund Correction Method

[jmartin]

A plan failed the ACP Test for the plan year ending 12/31/2014. There was a ACP refund due to to be given to HCE Randy. The refund amount of 117.18 (110.98 plus 6.20 earnings). The prior admin (we recently took over this plan) "corrected" by sending the 117.18 to the forfeiture account. I am not sure when in 2015 this was done, but let's say it was done after March 15th (if it matters)

This amount should have been sent to HCE Randy. What is the correction from here?

Can we simply move the amount out of forfeiture and back into his plan and then process the distribution to the participant? Or, Do we need to do a QNEC or One to One?

[Lou S.]

Was it unvested?

Was it related match that forfieted?

It is possible the prior TPA did it correctly and there is nothing to fix.

It sounds like the funds were timely removed from the HCEs account to pass testing, the issue seems to be should he have received a taxable excess aggregate refund from the Plan. Unfortunately I am not sure what the correct answer to your question is if the funds were supposed to be refunded to the HCE as opposed to forfeited from his account.

If the correction was done after 3/15 but before 12/31 it was timely for ACP correction but not timely to avoid the excess tax, unless it is part of automatic contribution arrangement that gets and extension of time to make the corrections (6/30 if I remember correctly).

[jmartin]

Let's assume the match was vested and should not have been forfeited. Does that change anything?.

[Lou S.]

Let's assume the match was vested and should not have been forfeited. Does that change anything?.

Yes, but I'm not 100% sure how it is corrected.

The funds were removed from his account so that's good. The funds were not refunded to the participant so that's bad.

I'm not sure what the proper correction method is at this point and if VCP is required or SCP can be used since you are still in the 2 year window perhaps someone else who has gone through a similar correction can chime in and help you.

[jmartin]

does anyone else have any input?

[Tom Poje]

ignoring the fact of an ACP test, lets suppose it was simply a termination distribution, and it was thought the person wasn't 100% vested, so an amount was put into suspense.

Under EPCRS you would want to put the plan in a position as if the error hadn't occurred so you would simply remove the amount from suspense and pay the participant.

I don't see why, just because there was an ACP there is anything different in the logic.

remember, EPCRS doesn't provide answers to every possibility, but it does give guidelines. when you don't have an example, I would try to, as EPCRS requires, put the plan in a position as if the error didn't occur.

so I would refund to the participant and get on with life.

...

even if he wasn't 100% vested last year, as long as he is active, you are permitted to refund the full amount as long as a 'vested' balance is tracked. 1.401(m)-2(b)(5) example 7. thus, in a few years the person might be 100% vested anyway....

[jmartin]

Everything I read says that if you are refunding after 12 months than you must make some form of a qnec. The issue seems to be can sending the ACP Refund to the forfeiture account be considered a correction even if not the right one? If so than we just distribute from the forfeiture account and send to the HCE. If not then wouldn't a QNEC be owed?

Also what about a 5330?

[Tom Poje]

unless I am reading something wrong in the original post, you aren't refunding after 12 months. the refund itself was done timely, it just didn't make it to the participant.

if the check was cut and was lost in the mail would you argue it wasn't done timely?

the only problem I see is that instead of being mailed to the participant it was put in suspense. without further guidance I would correct by getting it to the participant and go from there. it would put the plan in the same position as if the error hadn't taken place, the one difference being the person will be taxed this year rather than last year.

if the pan is auditing and the IRS questions it ask them to come up with a better on how to handle an amount slightly above $100.