Failure to make timely corrective distribution for Excess Contribution

[James Matt Ullakko]

Due to some Third Party Administration testing tracking problems...

A very small 401(k) Plan didn't perform ADP/ACP test for PYE 12/31/1999 -limitation year 1999. Test was performed for 1998 and 2000.

ADP/ACP Test fails for 1999.

If the corrective distribution for 1999 limitation year failure is made after 2000 plan year end, is IRS Rev. Proc. 98-22 the best option to correct?

If so, does anyone have experience using this method "permitted plan sponsor self-correction of certain qualification failures" ???

Any help is much appreciated!

Matt

[MWeddell]

The place to start is Revenue Procedure 2001-17. The IRS has started to update the various compliance correction programs annually, and this is the most recent guidance.

It's 90 pages long, including the appendices, so it'll take you a while to read and digest. You probably want to go through it and figure out whether your client qualifies for the Self-Correction Program.

[Richard Anderson]

Also, if my memory is correct, if a calendar 99 year plan fails the ADP test and does not correct by distribution by the end of 2000, the only self correction method available is probably QNECs.

[James Matt Ullakko]

Thanks for your responses.

I'll hope that the plan can use the APRSC...

[Guest Jim Kais]

Obviously, check 2001-17, but typically, the client could fund either a '1 to 1 qnec' and distribute the excesses to the HCEs in the current year (there will be a 10% excise tax as well) OR they could fund a full QNEC (much more expensive).

[MWeddell]

I agree with the prior post. However, the full QNEC could be allocated in a bottom up fashion, so it MIGHT not be as expensive as the previous post implies. I don't think we've got enough demographic information to tell you which correction method is best.

[Guest Jim Kais]

MWeddell - Absolutely, we do not have the demographics to make any plan specific commentary. As a side note, however, my recollection of 2001-17 leads me to believe that a bottom up QNEC was not an allowable corrective measure.

[James Matt Ullakko]

Thank you both for your help on this.

I think the 1 to 1 QNEC with the HCE excess being distributed is the route we'll probably take. I have one more question about the 10% excise tax. I read that the time requirement to file Form 5330 is 3/15 following the regulatory correction period of 12 months following plan year end tested.

For example, 1999 testing failures corrected October 2000 using 1 to 1 QNEC and distributing excesses to HCE's would require 10% excise tax to be filed prior to 3/15/2001. What if you make distributions to HCE's after 12 month correction period and do not file 2000 Form 5330 prior to 3/15/2001? Do you then file these excise tax amounts on the following year's 2001 Form 5330?

Thanks,

Matt