403(b) ACP test failed, refunds not returned prior to the following 12 month period - options

[HarleyBabe]

Morning all - have 403(b) plan that failed ACP.  For a variety of reasons the refunds were not made to the HCES within the 12 month period after the year in which the failure occurred and the CPA audit picked this up.  Keep in mind for 2023, they wouldn't be required to audit because of the new rules with participant counts and balances.    From what I am reading, it looks like correction is make the distributions, which has occurred, but then you also must provide a QNEC to "ALL" NHCEs eligible to defer.  BIG problem.  That alone throws them into an audit for 2023 because participants who 0 balances who we could normally exclude from the participant count will now receive like a $ 20 QNEC and now have a balance.  SOOOO help, am I missing something?  Advice, suggestions.  Anyone else read it other than ALL must receive and maybe just those who would have received that year.  This is one of those crazy cases where one thing leads to something much worse.

Next question, maybe I can figure a way to pass ACP after all.  Is shifting allowed in the 403(b) from ADP to ACP.  If so, how would that work.  ADP isn't required to be tested so can I shift as much as I want to ACP and therefore it would most definitely pass.

Any thoughts would be so appreciated.

Thank you.

 

[Tom Veal]

Your reading of the "one-to-one" correction method is right: QNECs can't be limited to NHCE's with account balances. As further bad news, the use of elective contributions to pass the ACP test is allowed only if the elective contributions are subject to the ADP test.  Treas. Reg. §1.401(m)-2(a)(6)(ii).

You could submit a VCP application requesting a different correction method. The IRS will consider other correction methods and might, under these circumstances, be amenable to allowing the plan to correct through qualified matching contributions, which would be allocable only to contributing NHCE's.

[HarleyBabe]

Thank you.  I thought this the case I was just hoping maybe I was missing something.