ADP Test Failure - not enough in 401(k) Account due to Loan

ADP test failed, and the HCE does not have enough in his 401(k) account to cover the required distribution (plus earnings) because he recently took a sizable loan, all from 401(k).  

I can't find anything that references a distribution hierarchy if a portion of the proceeds needs to be pulled from another source, but it seems to me that he must remove the required amount from his account, even if it means pulling from Rollover or another source.

Help!

imo part of the loan needs to be distributed but check the plan provisions

I agree with PP, distribute the portion of the loan attributable to the excess.

Seem like an accounting issue. Can't you simply transfer some of the rollover source to the 401(k) source and reassign an equal portion of the loan to be repaid to the rollover source?

401(k) deferrals and rollover funds have different characteristics and may be subject to different distribution and other rules so it may be a little more than an accounting issue.  Excess contributions are deferral amounts that caused the failure of the ADP test so the failure could not be corrected by directly or indirectly distributing rollover funds.

It's an investment issue. The loan I'm sure was assigned to the 401(k) source, there is likely no reason it couldn't have been assigned to the rollover source unless that is against the provision of the loan program but I can't think of any good reason that would be the case.

Let amount of outstanding Participant loan = Y

Let amount of refund = X

You move $X from rollover to 401(k) source and do refund

You change the loan so that outstanding principal in 401(k) source is (Y-X) and amount in rollover source is X.

You haven't changed the characteristic of any money just the investment fund of the sources.

Reverse/reissue the loan from other sources available for loan is a great way to provide funding in the 401k source, if available.  Also, waiting for loan payments to be posted to the 401k source in an amount to cover the ADP required distribution is another option -- with potential for excise tax due to payment after the 2 1/2 month deadline (or 6 months for certain auto-enrollment plans).

Interesting! so I need some $. Please oh please fail the ADP test so I can get a refund!

if the refund was $200 could you reduce the loan balance by $200 and issue a 1099 indicating $200 failed ADP test? In other words, if the loan was 5000, then the person  took a 4800 loan and had 200 in refund. in total the same, just that they get the 1099 for the distribution. that would seem like a wild work around as well, but then I'm not even sure if you could do that, but if in the unlikely case loans were only available from deferral...