Failed ADP Test Without Correction

Have a potential new client that just came to me with a failed ADP Test.  However, the previous TPA did not make any type of correction to the test.  Now we are left trying to figure out how to proceed:

1) Is this correctable via the VCP program?
2) In order to correct the testing, can we refund one participant enough in order to pass the testing?
3) What liabilities, if any, are there to the company?
4) What penalties could the Plan face?

You can always correct using refunds or QNECs up to 12 months after the end of the plan year that failed.

Otherwise, if it's eligible for self-correction, you can use the One-to-One method in rev. proc. 2021-30.

If it's not eligible for self-correction, then it's into VCP.

If you don't want to use the one-to-one method, you could try proposing an alternative method in VCP, but I think you'd better have a darn good reason why you aren't using the method that was specifically provided in the rev proc.

3 hours ago, C. B. Zeller said:

You can always correct using refunds or QNECs up to 12 months after the end of the plan year that failed.

Otherwise, if it's eligible for self-correction, you can use the One-to-One method in rev. proc. 2021-30.

If it's not eligible for self-correction, then it's into VCP.

If you don't want to use the one-to-one method, you could try proposing an alternative method in VCP, but I think you'd better have a darn good reason why you aren't using the method that was specifically provided in the rev proc.

In general, is there an issue with correcting the test by refunding one participant enough to get it to pass?

The first correction window is 12 months after the plan year end.

During that time, you can either refund certain amounts or do a QNEC (if it is current year testing).  If prior year testing, you can only do refunds. (Well, technically, you can use QNECs deposited during the testing year, but who makes those kinds of contributions other than when they have to for a correction of some sort)

After that 12 month window, you are in EPCRS territory, and the methods are spelt out there.  (Note, you can no do a QNEC, even if you have prior year testing.)  basically, the corrections are:  QNEC to pass the test OR do refunds and THEN the employer must provide a QNEC int he amount of the gross refunds.  Another note:  You can no longer test otherwise excludable separately.  

I think now under EPCRS you have 3 years after the end of the plan year to correct it.  After that, you have to submit under VCP.  If I'm wrong, then it's two years.

I always thought you should be able to make a QNEC on 12-29 if your YTD payroll is done, you test using prior year, and you know you're about to fail.

2 hours ago, Bri said:

I always thought you should be able to make a QNEC on 12-29 if your YTD payroll is done, you test using prior year, and you know you're about to fail.

Right, if its prior year testing you can only use a qnec deposited during the plan year.

On 9/23/2022 at 11:12 PM, metsfan026 said:

Have a potential new client that just came to me with a failed ADP Test.

Step 1: re-test,

Step 2: repeat Step 1 until test passes,

Step 3: new client signs fat consulting check

Never, ever, unless paid to do so, rely on someone else's test.