Failed ADP Test

[coleboy]

Client has failed their ADP test. Test was completed and client and participants were notified right on 3/15/17. Refunds were also requested on 3/16/17. Will they still be subject to the 20% penalty since this all happened on 3/15?

[BG5150]

There is an excise tax due of 10% on the gross amount of the refunds.

[Tom Poje]

 

, as Shakespeare said, in the regs it is 2(b)(5) or not 2(b)(5), that is the answer

it is only a 10% penalty, but it sounds like you are late to me.

in fact, I think most of the investment houses I deal with 'insist' refunds be done a week before hand because 'supposedly' they need time to process things. the regs don't say 'as long as you notify the folks by 3/15 you are ok' it says corrections must be made by 2 1/2 months, and I've never seen a write up that says Mar 16, arguing there are 31 days in March and you should be able to 'round' to the 16th. 1.401(k)-2(b)(5)

of course a QNEC could also be made.

[Bri]

I'd like to examine that "half a month" concept further.  Does an 11/30 plan year end only have until February 14th?  What if the checks are written before noon on the 16th?

Having a plan checking account would have at least let the plan issue checks on the 15th, and worry about truing everything up with the custodian later....since I'm sure that's what the IRS would want to see under examination.

[ratherbereading]

10 minutes ago, Bri said:

I'd like to examine that "half a month" concept further.  Does an 11/30 plan year end only have until February 14th?  What if the checks are written before noon on the 16th?

Having a plan checking account would have at least let the plan issue checks on the 15th, and worry about truing everything up with the custodian later....since I'm sure that's what the IRS would want to see under examination.

The refunds have to be processed from the investment house prior to 2 1/2 months after the end of the plan year. So for a 11/30 plan refunds should be processed a few days before 2/14 to be safe. The plan cannot write checks for the refunds.

 

[Tom Poje]

I guess if the 15th falls on a weekend you might get an extra day, I don't remember

[BG5150]

And I think it's supposed to be the check date, not the transaction date.

[Lou S.]

7 minutes ago, BG5150 said:

And I think it's supposed to be the check date, not the transaction date.

I think this is correct and how the IRS judges it. Though I think you could probably make an argument that is the funds were liquidated on the 15th and check issues on the 16th that the refund was made by the 15th. I don't know how an IRS auditor would rule on it.

That said in this particular case the refund was late since it wasn't even initiated at the investment house until 3/16 per the OP.

And it looks like the plan sponsor gets to file a 5330 and pay the 10% excise tax.

 

 

[401_noob]

I thought that this wasn't a deadline that was extended if it fell on a weekend or holiday based on some IRS publication from 2008 (I don't remember what it was titled).

Thanks!

[Lou S.]

1 hour ago, 401_noob said:

I thought that this wasn't a deadline that was extended if it fell on a weekend or holiday based on some IRS publication from 2008 (I don't remember what it was titled).

Thanks!

I can't remember if this one gets extended if it falls on a weekend or not (I think it does but wouldn't stake my life on it) but March 15, 2018 was a Thursday so for 2017 calendar year ADP tests it is a moot point.

[BG5150]

Gonna be Friday next year.

So, I think you will want all your refunds done by at least the 14th, so the check dates read 3/15.  Otherwise they will probably read 3/18 from most investment houses.

[austin3515]

HEre is my question. Since the timing of the payment no longer affects what year the distribution is taxed in, and if I have a fax confirmation that I send the refunds on March 13th or even 14th, and it was just processing time on the recordkeeper's side, does anyone really think the IRS is going to hold my feet to the fire on this, all for a 10% excise tax that is the result of administrative processing times???

I can't see it.  Now if I fax it over on March 16th, I'm doing the excise tax return, no doubt about it.

[Earl]

On 3/27/2018 at 10:06 AM, CEW said:

The plan cannot write checks for the refunds.

What do you mean by that?  Most of my plans can only get money out by issuing a check hand written by the Plan Trustee from the Plan's cash account.

[K2retire]

23 hours ago, Earl said:

What do you mean by that?  Most of my plans can only get money out by issuing a check hand written by the Plan Trustee from the Plan's cash account.

Perhaps CEW meant the employer not "the plan". That's a misnomer I often hear.

Most of our clients can only get a distribution by having the record keeper issue a check.

[ratherbereading]

31 minutes ago, K2retire said:

Perhaps CEW meant the employer not "the plan". That's a misnomer I often hear.

Most of our clients can only get a distribution by having the record keeper issue a check.

He mentioned a "plan checking account", which many employers have. So yes, the employer does not write a check, the investment house does.

[Bird]

Believe it or not, some 401(k) plans are pooled, and they can/might have checking accounts.  In that case, it is in fact a simple matter of writing a plan check.