Failed ADP oops it really passed

For the 2022 Plan Year, ADP testing was completed and refunds were issued in March 2023.  The participants received 1099-R’s in January ’24. 

It was later discovered the ADP test was run incorrectly, and approx. 10 HCE’s received too much in refunds.  A handful of those HCE’s have since terminated employment.

This is a large Plan that is audited. How (if at all) can this be corrected? I doubt any of the terminated participants would want to re-deposit the money into the Plan. Would the employer make a QNEC of the amounts refunded in error to those still in the Plan? 

You are dealing with a Correction of Overpayments (defined contribution plans and 403(b) Plans).  The procedures are spelled out in EPCRS in section 6.06(4) and Appendix B, section 2.04.

There are differing steps depending upon whether the participant is still active or has a balance in the plan or the participant has been paid out. There also are some alternatives based upon the amount of the overpayment.

Basically for a participant who is still active, start with asking for the money back.  The amount to be repaid includes the original distribution plus earnings using the plan's earnings rate.

Basically for a participant who received a distribution that was rolled over to an IRA or another qualified plan, send a written notice to the participant that the overpayment was not eligible for rollover.

Conceivably, if the plan permits in-service withdrawals after age 59 1/2 (for deferrals), then the excess could be considered an in-service withdrawal.

If the amounts do not qualify as "small Overpayments" (6.02(5)(c)) of under $250, then discuss with legal counsel whether to attempt to recoup the overpayment from the participant.

These are some of the highlights.  Expect to have some further complications related to the participants having filed their personal tax returns based on the 1099-Rs they received in 2024.  If any of the refunds also included Roth elective deferrals, that could add yet another layer of complexity.

A QNEC essentially would be giving a group of HCEs an additional contribution and that would be frowned upon as discriminatory.

In Lone Watie's immortal words in the movie Outlaw Josey Wales, endeavor to persevere!  Good luck.

Thank you so much for the reply! 

These clients come up with crazier scenarios each year - lol