Failure to Implement Employee Election & Failed ADP Test

[BLM]

Prior year tested plan failed ADP and corrective refunds to HCEs were issued timely.  It was then discovered during form 5500 financial audit processes that the employer neglected to apply deferral elections to year end bonus.  Employer will make 50% QNEC (plus earnings) to those affected for missed deferrals.  Some of those affected are HCEs.  Can I rerun the ADP test excluding altogether the HCEs whose elections were not properly implemented?  I still get failing results - with refund amounts less than those actually issued. 

[Tom Poje]

I'll answer the same way as I did above

EPCRS Appendix A .05 (2)(g) says

(g) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(b) through (f) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(2), in order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded.

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so does the term 'may' be it is optional, you can include the people and rerun the test?  I don't think so - there is no mention anywhere of rerunning the tests. The problem with the English language is 'may' can be understood different ways. there are other times in the regs in which 'may' is not meant to be understood as optional, but rather 'normally you can't do this, but in this situation you are allowed (and in fact you must do this)' somewhere in the ERISA Outline book is a discussion on the useof 'may', not in regards to this issue but another. maybe it was related match, the regs say they may be forfeited. not that it is optional, but rather, even if it was 100% vested, it may be forfeited anyway to be in compliance with other rules.