Timing of ACP Refund

[pam@bbm]

401(k) Plan has a discretionary match that is calculated after end of the plan year.     The ACP test fails and there is a return of excess to process.   However, the employer won't be depositing the match until probably May or June.     Do we still process that distribution by March 15 even though the deposit hasn't been made?    Doing so would take the withdrawal from the participant's current account balance.   Or do we wait until the match has been deposited and pay the 10% excise tax penalty?   

[Tom Poje]

my understanding is (I could be wrong):

no you can't refund what hasn't been made. probably for a couple of reasons

what if you have an HCE and this is the first year they deferred. you have nothing you could refund

what if (best laid plans of mice and men) the company decides not to make the discretionary match

of course that doesn't solve the pain in the rear 10% penalty except for either making the match earlier than normal or another option available under some documents is to limit the match to some of the HCEs. (This was from a FT William document, the issue was discussed a while ago, I mention this because the language used is not the greatest because in this case by 'excess contributions' they mean either deferrals or match.)

 

(i) Correction Methods. The Plan may, pursuant to applicable Treasury Regulations, do any of the following to avoid or correct excess contributions and/or excess aggregate contributions: (1) provide for the use of any of the correction methods described herein; (2) limit contributions in a manner designed to prevent excess contributions from being made; or (3) use a combination of

these methods.

[CJ Allen]

If using current year testing method, and plan allows, there could be a QNEC option that gets rid of the distribution excise tax.

[Bri]

If nothing else, they really gotta get rid of the 10% penalty tax.  Wasn't this in place because refunds used to be taxable for the year of the contribution rather than the distribution, so you had to give the employee enough time after March 15 to complete his taxes?