Revised ADP refunds because of bad compensation

Hello,

What should we do if a plan previously corrected a failed ADP test timely but then years later, inform us that compensation was incorrect and after re-running, the refunds should have been even higher?  Would this be considered a late correction (after 12 months ... and would we have to go through VCP)?  Or could we simply just have extra corrections processed for the affected participants still in the plan and perhaps inform the ones that have left that they might have ineligible money sitting in whatever account they moved to?  

I can't find anything for this scenario.  I know if the refund amounts that came out were too high to begin with, we make an effort to have the money returned to the plan.

Thanks!

You didn't make complete corrections. It sounds like you have an ADP failure correctable under VCP.

Not SCP?

I think if the ADP failure was for 2014 or later, you can use SCP. For a 2014 failure, the distributions (i.e., the correct distribuions) should have been made in 2015, so you could correct them under SCP by end of 2017. Earlier than that, you're into VCP.

My fingers say 2015 or later because correcting under SCP by end of 2017 is a hard slog in March of 2018.  And I would say there is a possibility that the correction is with respect to an insignificant error and, if so, SCP might still be available.  Otherwise, it is VCP or audit lottery.

Good point, Mike, could be insignificant depending on relative number of HCEs who got wrong amounts and the individual shortfall amounts. Actually, probably is insignificant.

However, if the error was significant, I'll stand on 2014 vs. 2015. If the ADP test was failed for 2014 because some HCEs were distributed too little, then under 401(k)(8) and (m)(6) they would have had until the end of 2015 to fix without EPCRS at all (and would have owed the 4979 excise tax on the aggregate shortfall amounts, unless corrected by 3/15/2015). and under 9.02(1) of review 2016-51 would have had until 12/31/2017 to fix under SCP ()and would still owe the 4979 excise tax.)

How do you do that now? 

You could either do late QNECs (duh), or, as pholosophizer's question suggests, make late distributions with earnings now to continuing employees and termed vested who have not yet received distributions and write letters to those termed vested who did get eligible rollover distributions telling them that parts of the distributions did not qualify for rollover.

Don't forget the one-to-one correction method under Appendix B of Rev. Rul. 2016-51 is also available (e.g., distribute/forfeit additional excess & earnings to HCEs AND make an equivalent QNEC to NHCEs).  This method is usually less expensive than the QNEC correction under Appendix A, which requires an QNEC allocation to all NHCEs sufficient enough to bring the ADP/ACP percentage up to passing.  And the one-to-one method provides more flexibility on who gets the contribution - you can avoid giving a QNEC to NHCEs who have since terminated, if the plan is current year tested.

Another thought, however.  If you originally used disaggregation, you do not have that available to you under the EPCRS correction.  You must test the plan as a whole.  This will probably further increase your refunds...