Returns of excess cont's too late!

[Guest PLHart]

We agreed to take over a plan several months ago. Yesterday, during a final asset reconciliation for the Jan 2000 thru Jun 2000 period, we found several distributions that, when identified by employer, were returns of excess contributions (due to failure of ADP test) attributable to 1998!!(calendar year plan) Obviously this correction did not occur within the required 12 month period following plan year in which excesses occurred. This is a disqualifying event. Does anyone know of a way this can be voluntarily corrected, or any other method to avoid disqualification if uncovered by IRS? Although we have aleady committed to administer this plan, how might we reneg on that commitment?

[pjkoehler]

The implications of a failure to correct excess contributions within 12 months of the close of the plan year for which they are made is spelled out in Reg. Sec. 1.401(k)-1(f)(6)(ii). The CODA portion of the plan fails 401(k)(3) for that plan year and subsequent plan years until the excess is distributed. That means you have to apply the rules applicable to nonqualified CODAs in Reg. Sec. 1.401(k)-1(a)(5) for those years. Elective contributions are treated as employer contributions subject to the all the nondiscrimination requirements applicable to non-401(k) plans and the pre-tax treatment of all elective contributions is disallowed requiring the filing of corrected W-2s (with nasty implications for the employees' tax returns and liabilities). However, the qualified status of the underlying profit sharing plan is not automatically jeopardized. It has to be tested for nondiscrimination without regard to any special rules under 401(a)(4) AND 410(B) regs applicable to 401(k) plans. Reg. Sec. 1.401(k)-1(a)(5)(iv).