ADP testing

[cpc0506]

Hello.  We are TPA for a plan that utilizes an auto-enrollment feature in the plan.  Client realized that he missed enrolling a handful of employees in 2017.  The client did not contact us to determine the best way to handle this situation.  They enrolled each employee approximately 3 months late.  Client did not know that by not providing a notice to the participants within 45 days of starting the deferrals, that client is now subject to QNECs for these participants. 

1.  Have we interpreted the ruling correctly that the client is now subject to making required QNECs for the affected participants?

2.  How are the participants reported on the ADP Test?  Do we include the QNEC contribution in the testing?

Please advise.  Thanks.

 

[Kevin C]

It looks like 1 refers to them not satisfying the safe harbor correction method in Rev. Proc. 2016-51 Appendix A .05 (9) since they did not provide the required notice.  I agree that no notice means they don't qualify for the safe harbor correction, but there might be other ways to correct.  The old "brief exclusion" correction in Appendix B 2.02(a)(ii) doesn't require a notice, but does require that they be able to defer for the last 9 months of the plan year and have the opportunity to contribute the maximum allowable deferrals for that year.  Also, the correction methods in the Rev. Proc. are not required.  I tell clients the Rev. Proc. methods are pre-approved correction methods because the IRS has to accept the correction if you use one of the listed methods.  That doesn't mean other correction methods are not appropriate, but you may have to justify the correction used if the IRS comes calling. 

 

For 2, you are not required to re-run the ADP test after correcting for those who were improperly excluded.  See Appendix A .02 (2)(g).  If ADP/ACP testing fails, you have to correct that before you can do the correction for those improperly excluded.