FAILED ADP/ACP TEST and HCEs terminated and already took 100% of their account

Client company sold and all of the HCE's terminated in May 2021.  They immediately took distributions.  Now as I run the ADP/ACP test I find that a corrective distribution was due one of them.  Do they need to have the Platform reissue the 1099R and if they rolled the funds - do they have to withdraw it from their IRA?  

My understanding is yes and yes, but I am long removed from administration of these.

Probably needs to provide some documentation to IRA custodian as well.

19 hours ago, CuseFan said:

My understanding is yes and yes

agreed.  Good luck gtting the custodian to do it.

The refund (that didn't happen) should be withdrawn as an excess contribution.  Shouldn't be too difficult at that end.

See instructions for Form 1099-R. On the 2022 instructions it's on page 7 under the heading "Failing the ADP or ACP Test after a Total Distribution" but it's been the same for quite some time, though it may be on different pages of the instructions in earlier years.

https://www.irs.gov/pub/irs-pdf/i1099r.pdf

I would also suggest including a short narrative explaining why the 1099-R is being corrected and that because the excess did not qualify for rollover it should be rolled back out to avoid penalties.

To what extent should the plan sponsor press a participant, in this situation, to return match $$ which should have been forfeited as a result of the ROE, but were not because he rolled assets out prior to the completion of corrective action?

I suggest skimming EPCRS for the specifics on getting an Overpayment returned back to a DC plan.  If that too was rolled over to the IRA it's an ineligible rollover contribution, so the participant has a reason to at least fix *that* part of it.

Here's another twist/question: Assume a HCE takes a full distribution from Plan A, and rolls it over to their new employer's plan, which we'll call Plan B.

HCE is later due an ADP refund from Plan A. Given that there is no account balance left, Plan A adjusts the 1099-R for the rollover, and they also create a new 1099-R to reflect the ADP refund amount (with the applicable distribution code).

The HCE contacts their new employer to inform them that a portion of their rollover was ineligible. Plan B proceeds with distributing this money back to the individual.

Question: What if Plan B issues a 1099-R for the distribution of these excess contributions (from Plan A)? The individual is left with duplicate 1099-Rs. Should the HCE have informed their new ER that a 1099-R has already been issued (by Plan A)? Who should really be issuing the 1099-R for the ADP refund? Plan A or Plan B?

Plan B shouldn't be issuing a 1099 for this.  They're just fixing an inappropriate rollover CONtribution.

I haven't done it in a while buy I think there is 1099-R coding for a refund of an Excess Contribution that will indicate it is not taxable.

On 2/22/2022 at 8:48 AM, Lou S. said:

See instructions for Form 1099-R. On the 2022 instructions it's on page 7 under the heading "Failing the ADP or ACP Test after a Total Distribution" but it's been the same for quite some time, though it may be on different pages of the instructions in earlier years.

https://www.irs.gov/pub/irs-pdf/i1099r.pdf

 

Ok similar situation (ADP Test failure but participant already terminated and full account distributed), and thank you Lou for the cite in the formal directions.

Additional questions:

• Is there a due date for the 1099-R's? No transaction left to make by 3/15
• Instructions say, "and allocable earnings" - account was distributed during the plan year of failure so it seems to me there are no allocable earnings, or if they are, we would not have access to either a bank account, IRA or new plan where the money was put into.

For allocable earnings I always took that to mean the earnings while in the Plan.

So if the guy rolled over say $100,000 in June but was due a refund of $5,000 after testing and the earnings from BOY to date of distribution was say 5% the earnings would be $250.00.

The Plan presumably sent him a 1099-R in January for $100,000 showing code G rollover.

Now you would send him two amended 1099-Rs one showing $94,750 and code G and one for $5,250 with whatever the code for refund is (8 maybe?) I'd have to look at instructions) and presumably a letter explaining why that amount is not eligible for rollover is includable in his income in the year of distribution and needs to be removed from his IRA as an excess IRA contribution before the due date of his tax return with extension to avoid the 6% excise tax each year it remains in the IRA.

The participant would be responsible getting the funds from the IRA as a return of excess IRA contribution along with any earnings while in the IRA. Most IRA custodians I would assume have such a form or procedures in place. The trick is to use the correct language that it's a return of excess IRA contributions and not a regular IRA distribution.

From the Plan standpoint, correcting the 1099-R is what is required at a minimum.

Thanks Lou! for taking time out of your busy day for a well thought out response!