ADP and ACP Test Correction

[Dougsbpc]

We administer a calendar year 20 participant 401(k) plan with salary deferral, match and profit sharing.

They failed the ADP/ACP test for 2025 so refunds will need to be done this week to HCEs. We spoke to them about making safe harbor contributions, QNEC etc. but they just want to go ahead with refunds. And the refunds are not so bad (around few thousand for each of the three HCEs).

In this case they have a discretionary match.

Question: they have a discretionary match and have been happy doing it that way. Also, they usually fund the match around early May when they fund profit sharing contributions (corporation goes on extension). How do we correct discretionary match contributions when they will not be funded until early May? 

So suppose we have the following:  a discretionary match of $40,000 will be funded for the 2025 year. Suppose the 3 HCEs would each be entitled to a $5,000 match and match contributions of $700 each would need to be forfeited to pass the test. I would think these forfeitures would need to happen for the 2025 year but would not be available to use until the 2026 year (plan uses forfeitures to reduce subsequent year contributions). I don't think we could just have them fund $37,900 ($40,000 - $2,100) for the 2025 year. So I would think we would show full match contributions on the 2025 benefit statements for the three HCEs. Then in 2026 show $700 each being forfeited from their match accounts.

Does anyone agree / disagree?

Thanks.

 

[Below Ground]

To correct the ACP Test Failure remove an amount equal to the excess contributions from the person's account.  The correction does not need to use the exact dollars being deposited.  It just needs to come out of the right account of the person.  There was one funding platform that always gave us trouble with this every year.  At that time I sent them a copy of regulations that showed monies just need to come out of the right person's account and proper contribution source, and we have not had any problems since.  I note that we have even had plans audited and this approach was deemed correct.  That was many years ago, but if you look you should be able to find it.