Delinquent Refund of Excess Deferrals Related To Failed ADP

[Guest Peter Riggins]

What is the best way to correct a situation where excess contributions were not refunded (based on failure of ADP test) by the deadline (12/31 of year following the plan year in question) in a 401(k) plan?

[Guest Benefits Lady]

See Rev Proc 2000-17 which details the IRS correction programs. I believe there are two acceptable ways to correct. One is to make a QNEC, the other is to make distributions to highly compensated but then the sponsor must also make a corresponding contribution to the plan in an amount equal to what was distributed. (It's the penalty for failure to timely give refunds).

[Guest kurt johansen]

I recently looked at this issue for a client. I agree with Benefits Lady. The good news is that the error can be corrected under SCP (formerly APRSC). The bad news is that any distributions will be subject to an excise tax due to the fact that they were distributed more than 2 1/2 months after the end of the Plan Year in which they were contributed.

Kurt