Improperly excluded employee - ADP test

Any input is appreciated for the scenario below:

Eligible employees were improperly excluded from plan participation in 2009. Plan was not SH but no ADP/ACP tests were run.

We correct in 2020:

• first we run the ADP/ACP tests for 2009
• if the tests fail, we correct the ADP/ACP
• we determine the correct contribution amounts based on EPCRS

QUESTION: do we need to re-run the ADP/ACP tests before making the corrective QNECs

Thanks

See Rev Proc 2019-19, Appendix A.05(2)(g). The excluded employees with the missed opportunity to defer are not included in the ADP/ACP tests. 

"(g) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(b) through (f) cannot be Page 79 of 125 used until after correction of the ADP or ACP test failures. For purposes of this section .05(2), in order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded."

2 hours ago, taxllm said:

Any input is appreciated for the scenario below:

Eligible employees were improperly excluded from plan participation in 2009. Plan was not SH but no ADP/ACP tests were run.

We correct in 2020:

• first we run the ADP/ACP tests for 2009
• if the tests fail, we correct the ADP/ACP
• we determine the correct contribution amounts based on EPCRS

QUESTION: do we need to re-run the ADP/ACP tests before making the corrective QNECs

Thanks

2009 or 2019?

Mike - it was 2009 - long standing error on misclassifying employees.

justanotheradmin I am familiar with the cite from EPCRS. I understand that if the plan also failed the tests, the plan needs to correct the ADP/ACP first and it may disregard the employees who were improperly excluded when running the tests. My question is after the ADP/ACP is corrected and we correct the excluded employees by making the corrective contributions, do we need to rerun the ADP/ACP?

The IRS says that "Before correcting for the exclusion, however, the plan must evaluate whether, in the event that the employee had made the missed deferral, it would still pass the applicable ADP test. The ADP test should be corrected according to the plan’s terms before implementing any corrective contribution on behalf of the employee. In addition, the missed deferral amount should be reduced, if necessary, to ensure that the employee’s elective deferrals (the sum of deferrals actually made and the missed deferrals, for which a corrective contribution may be required) comply with all other applicable plan and legal limits."

Is this what you are citing from? https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-correcting-a-failure-to-effect-employee-deferral-elections

42 minutes ago, taxllm said:

The IRS says that "Before correcting for the exclusion, however, the plan must evaluate whether, in the event that the employee had made the missed deferral, it would still pass the applicable ADP test. The ADP test should be corrected according to the plan’s terms before implementing any corrective contribution on behalf of the employee. In addition, the missed deferral amount should be reduced, if necessary, to ensure that the employee’s elective deferrals (the sum of deferrals actually made and the missed deferrals, for which a corrective contribution may be required) comply with all other applicable plan and legal limits."

Or something else? 

48 minutes ago, taxllm said:

 My question is after the ADP/ACP is corrected and we correct the excluded employees by making the corrective contributions, do we need to rerun the ADP/ACP?

What data would you use for the 2nd ADP/ACP tests? You would add the missed people in? At what rate? 0%? What rate are you using as their missed rate? The NCHE and HCE averages for those that were given the opportunity to defer?  Then wouldn't the second run be materially the same as the first? Though even after correcting routine failed ADP/ACP test - the test don't always pass. If doing HCE refunds, the refund calculations aren't designed to result in a passing test. 

Do you have a failure to implement a deferral election? (in which case that is different - and I can understand your quote from the IRS website) Or do you have a failure to be offered the ability to defer? Perhaps I misunderstood your original post - I thought it was the later - that people weren't offered deferrals at all. 

I guess what I am saying is I have never re-run the ADP/ACP test after doing a missed deferral correction after an ADP / ACP test fails.  Nor am I aware of anything in the Rev Proc that requires it. Which is what I cite to in SCP and VCP documentation. Not the IRS website.  

justanotheradmin thanks I know where I was confusing the issue (I am not a TPA)