ADP Failure in Making Timely Corrective Distributions

[Mr Bagwell]

We brought in a new plan in April 2016 and found out in March 2017 that the 2015 ADP refunds were not distributed.

In lieu of QNEC, I think the one-to-one correction method (refunding excess contributions too) is going to be the cheapest route for fixing.  I cannot find the in the EPCRS language or in the EOB books that this is also a QNEC deposit.  The EOB just says "corrected with a contribution".

This correcting contribution is a QNEC, right?

Thanks

[Tom Poje]

like a lot of these things, you have to look hard enough to find what you want. what a bother.

EPCRS

Appendix B

Section 2

(b) One to One Correction method

....

(iv) Contribution and Allocation of Equivalent Amount. (A) The Plan Sponsor makes a contribution to the plan that is equal to the aggregate amounts distributed and forfeited under paragraph (1)(b)(iii)(A) (that is, the excess contribution amount adjusted for Earnings, as provided in paragraph (1)(b)(iii)(A), which does not include any matching contributions forfeited in accordance with § 411(a)(3)(G) as provided in paragraph (1)(b)(iii)(B)). The contribution must be a QNEC as defined in § 1.401(k)-6.

[Mr Bagwell]

Thanks Tom!

[Mr Bagwell]

I'm trying to work up the earnings amount to come up with the one to one grand total.

I have the refund earnings for 2015 from the 2015 testing. (Actual losses at that point)

Does the earnings workup start from 1/1/2016 because of the failure to distribute in 2016?

Thanks

[Tom Poje]

(iii) Distributions and Forfeitures of the Excess Contribution Amount. (A) The portion of the excess contribution amount assigned to a particular highly compensated employee under paragraph (1)(b)(ii) is adjusted for Earnings from the end of the plan year of the year of the failure through the date of correction.

Hadn't thought about it before, but I guess that means it is the only time you use GAP period income

 

the example from EPCRS is

Example 1:

Employer A maintains a profit-sharing plan with a cash or deferred arrangement that is intended to satisfy § 401(k) using the current year testing method. The plan does not provide for matching contributions or after-tax employee contributions. In 2007, it was discovered that the ADP test for 2005 was not performed correctly. When the ADP test was performed correctly, the test was not satisfied for 2005. For 2005, the ADP for highly compensated employees was 9% and the ADP for nonhighly compensated employees was 4%. Accordingly, the ADP for highly compensated employees exceeded the ADP for nonhighly compensated employees by more than two percentage points (in violation of § 401(k)(3)). There were two highly compensated employees eligible under the § 401(k) plan during 2005, Employee P and Employee Q. Employee P made elective deferrals of $10,000, which is equal to 10% of Employee P's compensation of $100,000 for 2005. Employee Q made elective deferrals of $9,500, which is equal to 8% of Employee Q's compensation of $118,750 for 2005.

Correction:

On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with § 401(k)(8)(C), $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and $2,937.50 to Employee Q. It is determined that the Earnings on the assigned amounts through June 30, 2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the Earnings are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687) and Employee Q receives $3,524.50 ($2,937.50 + $587). In addition, on the same date, Employer A makes a corrective contribution to the § 401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their compensation for 2005 (subject to § 415 for 2005).

 

 

the complete handy dandy EPCRS is attached

 

epcrs 2016.pdf

[Mr Bagwell]

That  was my initial thought too, Tom.  Distribute within timing standards or suffer the gap income calculation.

Thanks again.

[Mr Bagwell]

I'm struggling a bit with who receives the QNEC.  And maybe the compensation used.   Plan is prior year tested, so a little different wording is substituted in Epcrs.

It appears that the QNEC is going to be for eligible employees "the year prior to the year of the failure" who were nonhighly compensated.....  and correction stipulates that the QNEC is for only the employees who are still employees on the date of correction.  I don't think I have to worry about the employees that terminated prior to correction except those that terminated in correction year.  If that makes sense.

I don't get nuance difference between current year correction vs. prior year correction method.  I think I use the compensation from the 2015 census.

Thanks for the help and clarification.

[Mr Bagwell]

Anyone have a few minutes for me?  Maybe a phone call?

[Tom Poje]

example 1 (see last sentence) is

On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with § 401(k)(8)(C), $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and $2,937.50 to Employee Q. It is determined that the Earnings on the assigned amounts through June 30, 2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the Earnings are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687) and Employee Q receives $3,524.50 ($2,937.50 + $587). In addition, on the same date, Employer A makes a corrective contribution to the § 401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their compensation for 2005 (subject to § 415 for 2005).

 

...........

sorry, I am in Jacksonville Florida and only taking a quick look at anything on the Links here.  I've got some things I'm doing around house that concern me a little bit more than some of this.

[Mr Bagwell]

Indeed you do, Tom.  Thanks.