Terminated Plan Failed ADP/ACP Testing

Hello all,

This is a first for me. The plan terminated and assets have been liquidated from record keeper. The plan failed ADP/ACP testing with two participants requiring employer match funds to be returned to the plan. My understanding is once the two participants transfer the employer match funds back into the forfeiture account (via rollover from participant's IRA), those funds will get evenly distributed amongst participants who had balances as of the date of the plan termination. Is this correct?

Alternatively, what would happen if the plan decides to do nothing? What penalties will incur? The employer funds only total $900 and if distributed amongst participants, the participants would receive very low amounts. 

Any insight would be helpful!

Wouldn't the participants have become fully vested when the plan terminated? Then the ACP excess contributions would be distributed, instead of forfeited. The amounts distributed would not be eligible for rollover, so you might need to issue corrected 1099-Rs and notify the participants that they need to remove the amounts attributable to the corrective distributions from their IRAs.

Maybe he's referencing orphan match, rather than nonvested ACP excess.

In any event, the actual reallocation of any forfeitures is determined by the plan document.  Could be a yes.

As for penalties, I suppose it's the usual - the IRS would have to find out first and this isn't the kind of issue that gives itself away.

How much is it?  And how many people would it be reallocated to?

1 hour ago, BG5150 said:

How much is it?  And how many people would it be reallocated to?

$900 and 8 participants. 

Hmm.

Did you see Bri's note above mine?  

Is this ineligible match due to ADP failure, or the ACP refund itself?

Side note:  there would NOT be a rollover from the IRA back tot he plan.  You/they would inform the IRA holder that $x was an inadmissible contribution to the IRA and it should be removed from the account and transferred back (with earnings) to the plan trust.  A rollover would generate a 1099.  There should NOT be a 1099 for this reversal.

And this is why HCEs are last in having their accounts distributed in a plan term.  Gotta wait for the testing to be done.  Or risk having to go through these shenanigans...

Did you try testing again?  $900 seems like a low hurdle...  Do you have room to shift?  Is it current year testing and an additional QNEC would be simpler to manage?  Do you have excluded compensation items and a safe harbor definition or gross 415 compensation will lower the HCE rate?  Did you use statutory exclusions and check the alternate entry dates allowable?