Mid-Plan Year Termination and Failed ADP Test

[msmith]

Calendar Year plan terminating mid-year in 2018. Plan Sponsor is hoping to have all participants paid out before 12/31/2018, to avoid a 2019 5500 filing. However, the Plan has failed the ADP Test for the 2018 Plan Year (from 01/01/2018 to date of termination - business sold).

Is it possible to calculate corrective distributions mid-year to avoid the 2019 5500 filing? If so, do I just use the gain/loss to a current date?

[Lou S.]

We have done this on a few occasions in the past. I don't see any prohibition against it. You can make the refunds once you have all the data to calculate them.

If it is daily valued, yes we would calculate G/L though the date the refund was requested, I don't think the IRS would ever challenge that as an unreasonable position.

 

[Tom Poje]

There is what I call a strange provision is in the regs, I have never seen anyone explain it further.

1.401(k)-2(b)(2)(v)

 

...except as otherwise provided in this paragraph (b)(2)(v) a distribution of excess contributions must be in addition to any other distributions made during the year...In the event of a complete termination of the plan during which the excess contribution arose, the corrective distribution must be made as soon as administratively possible after the date of termination of the plan, but no later than 12 months after the date of termination.

And then the concluding sentence...

If the entire account balance of the HCE is distributed prior to when the plan makes a distribution of the excess contribution in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contributions (and income) to the extent that a corrective distribution would otherwise have been required.

.....

If I read that correctly, it seems to say, well what the heck, in the case of a  plan that is terminated and everything paid out within 12 months don't worry about it.

[401_noob]

but what if everything was paid out within 12 months but the HCE's account, a portion of which was ADP excesses, was rolled to an IRA?

[Bri]

Then the excess portion represents an ineligible IRA contribution - get it out of the IRA with its allocable earnings

[chc93]

And I think the responsibility for getting an ineligible IRA contribution out of the IRA falls to the participant and the IRA custodian... not the plan.  The plan only needs to notify the participant and IRA custodian of the ineligible IRA contribution amount.

[JamesK]

15 minutes ago, chc93 said:

The plan only needs to notify the participant and IRA custodian of the ineligible IRA contribution amount.

This seems like the less employee-friendly option but it sounds reasonable given the regulation cited above. 

[msmith]

My question related to the gain/loss allocation attributable to the Plan Year (no short Plan Year here, unless all accounts paid out before 12/31/2018. The Plan Document defines "income" as follows:

"Income" means the gains or losses for the "applicable computation period" allocable to an "excess amount," which amount shall be determined and allocated, at the discretion of the Administrator, using either of the methods set forth in (a) or (b) below:

(a)   Method of allocating Income. The Administrator may use any reasonable method for computing the Income allocable to an "excess amount" for the "applicable computation period," provided that the method is used consistently for all Participants and for all corrective distributions under the Plan for the "applicable computation period," and is used by the Plan for allocating earnings to a Participant's "specific account(s)."

(b)   Alternative method of allocating Income. The Administrator may allocate Income to an "excess amount" for the "applicable computation period" by multiplying the earnings for the "applicable computation period" allocable to the "applicable contributions" taken into account under the test or limitation giving rise to such "excess amount" by a fraction, the numerator of which is the "excess amount" for the Employee for the "applicable computation period," and the denominator of which is the sum of:

 

(1)   The "specific account(s)" balance(s) taken into account under the test or limitation giving rise to such "excess amount" as of the beginning of the "applicable computation period," and

(2)   Any additional amount of such "applicable contributions" made for the "applicable computation period" to the "specific account(s)."

 

 

(d)   For purposes of calculating the Income attributable to Excess Contributions of Section 4.6(b), the terms "applicable computation period", "applicable contributions", "excess amount", and "specific account(s)" will have the following substitutions:

(1)   The Plan Year shall be substituted for the "applicable computation period";

 (2)   Elective Deferrals, and other contributions included in determining the ADR under Section 1.9, shall be substituted for "applicable contributions";

 (3)   Excess Contributions shall be substituted for "excess amount";

(4)   The Elective Deferral Account, and, if included in the determination of the ADR under Section 1.9, the Qualified Matching Contribution and/or the Qualified Nonelective Contribution Account(s), shall be substituted for the "specific account(s)."