ADP/ACP TESTING
401(k) plans that have not adopted Safe Harbor provisions must pass the Actual Deferral Percentage (ADP) test each year. This test compares the average contribution of the Highly Compensated Employees to the average contribution of the Non-Highly Compensated Employees. A similar test is applied to any employer matching contribution. 403(b) plans that have a matching contribution must also pass the ACP test, but they are not required to take the ADP test. View our related post about the ADP Test here.
If a Plan fails one or both of these tests, a correction must be made. Either some money is returned to the Highly Compensated Employee(s) or the company can make a Qualified Non-Elective Contribution (QNEC) to the Non-Highly Compensated Employees. This QNEC must be deposited no later than the end of the following Plan year.
Problem: The testing for a Plan failed, but was not corrected by the end of the following plan year.
Fix: The only remedy for correcting a Plan after the end of the following year is to make a one-to-one QNEC. The testing needs to be performed properly. The Highly Compensated Employee(s) must take a withdrawal of their excess contributions and a contribution equal to the amount of that withdrawal is made as a QNEC to the Non-Highly Compensated Employees
For example: Pony Express Delivery Company has a 401(k) plan. Pony Express is owned by Jack and Jill, and their daughter Robin is one of 17 employees. When the ADP testing for 2012 was performed in 2013 Robin was not included in the Highly Compensated Group (children of owners are considered owners). In 2014 Pony Express hired a new TPA who recognized this mistake and they re-ran the ADP test for 2012. The test failed. Since the test was not corrected by the end of 2013, Jill was required to take back $5,000 of her elective deferral, and a QNEC of $5,000 was required. The $5,000 QNEC would be deductible to Pony Express in 2014.
DEPOSITING CONTRIBUTIONS TIMELY
Any money deducted from an employee’s paycheck must be deposited to the Plan as soon as administratively feasible. There is a 7 business day “safe harbor” for companies with fewer than 100 employees. For companies with over 100 employees, there may be less than 7-days allowed if some deposits are made more rapidly than that. The Department of Labor is very strict about adhering to this rule. At Benefit Resources part of our year-end data request includes a summary of deposits made so that we can help identify deposits that may have been considered late.
Problem: For whatever reason, elective deferrals and/or loan payments were not remitted to the Plan’s investment custodian within the 7-business day window. Late deposits must be disclosed on the Form 5500 filing for the Plan year even if they have subsequently been corrected.
Fix: Make the deposit as soon as it is identified. To determine the interest due on the late deposit, the Department of Labor has a calculator on their website. The interest must also be deposited to the Plan (it may be allocated only to current participants). An excise tax of 15% of the interest amount is due to the IRS and remitted on a Form 5330. Alternatively, you can go through the Department of Labor’s voluntary compliance procedure to avoid the excise tax.
For example: Rose is the payroll manager for Alligator Farms. When processing payroll on March 15, 2014 she realizes that she failed to remit the 2/28/2014 401(k) contributions in the amount of $5,000 for the Alligator Farms Plan. She sends in the contributions for both 2/28 and 3/15 on 3/28/2014. She can either engage Benefit Resources to help her fix this, or she can go to the DOL website here to calculate the late interest on the $5,000 of deferrals and loan payments from 2/28 payroll. Let’s say the interest comes to $17. She deposits that $17 in late interest to the participants as an employer contribution. The excise tax of $2.55, or 15% of the $17 in interest, is remitted to the U. S. Department of the Treasury on Form 5330. The Form 5330 filing is due not later than the Form 5500 filing for the year. In the event that the Form 5330 is filed late, there may be additional fees.
Following are some helpful hints for using the DOL website to correct late deposits using our example:
401(k) plans that have not adopted Safe Harbor provisions must pass the Actual Deferral Percentage (ADP) test each year. This test compares the average contribution of the Highly Compensated Employees to the average contribution of the Non-Highly Compensated Employees. A similar test is applied to any employer matching contribution. 403(b) plans that have a matching contribution must also pass the ACP test, but they are not required to take the ADP test. View our related post about the ADP Test here.
If a Plan fails one or both of these tests, a correction must be made. Either some money is returned to the Highly Compensated Employee(s) or the company can make a Qualified Non-Elective Contribution (QNEC) to the Non-Highly Compensated Employees. This QNEC must be deposited no later than the end of the following Plan year.
Problem: The testing for a Plan failed, but was not corrected by the end of the following plan year.
Fix: The only remedy for correcting a Plan after the end of the following year is to make a one-to-one QNEC. The testing needs to be performed properly. The Highly Compensated Employee(s) must take a withdrawal of their excess contributions and a contribution equal to the amount of that withdrawal is made as a QNEC to the Non-Highly Compensated Employees
For example: Pony Express Delivery Company has a 401(k) plan. Pony Express is owned by Jack and Jill, and their daughter Robin is one of 17 employees. When the ADP testing for 2012 was performed in 2013 Robin was not included in the Highly Compensated Group (children of owners are considered owners). In 2014 Pony Express hired a new TPA who recognized this mistake and they re-ran the ADP test for 2012. The test failed. Since the test was not corrected by the end of 2013, Jill was required to take back $5,000 of her elective deferral, and a QNEC of $5,000 was required. The $5,000 QNEC would be deductible to Pony Express in 2014.
DEPOSITING CONTRIBUTIONS TIMELY
Any money deducted from an employee’s paycheck must be deposited to the Plan as soon as administratively feasible. There is a 7 business day “safe harbor” for companies with fewer than 100 employees. For companies with over 100 employees, there may be less than 7-days allowed if some deposits are made more rapidly than that. The Department of Labor is very strict about adhering to this rule. At Benefit Resources part of our year-end data request includes a summary of deposits made so that we can help identify deposits that may have been considered late.
Problem: For whatever reason, elective deferrals and/or loan payments were not remitted to the Plan’s investment custodian within the 7-business day window. Late deposits must be disclosed on the Form 5500 filing for the Plan year even if they have subsequently been corrected.
Fix: Make the deposit as soon as it is identified. To determine the interest due on the late deposit, the Department of Labor has a calculator on their website. The interest must also be deposited to the Plan (it may be allocated only to current participants). An excise tax of 15% of the interest amount is due to the IRS and remitted on a Form 5330. Alternatively, you can go through the Department of Labor’s voluntary compliance procedure to avoid the excise tax.
For example: Rose is the payroll manager for Alligator Farms. When processing payroll on March 15, 2014 she realizes that she failed to remit the 2/28/2014 401(k) contributions in the amount of $5,000 for the Alligator Farms Plan. She sends in the contributions for both 2/28 and 3/15 on 3/28/2014. She can either engage Benefit Resources to help her fix this, or she can go to the DOL website here to calculate the late interest on the $5,000 of deferrals and loan payments from 2/28 payroll. Let’s say the interest comes to $17. She deposits that $17 in late interest to the participants as an employer contribution. The excise tax of $2.55, or 15% of the $17 in interest, is remitted to the U. S. Department of the Treasury on Form 5330. The Form 5330 filing is due not later than the Form 5500 filing for the year. In the event that the Form 5330 is filed late, there may be additional fees.
Following are some helpful hints for using the DOL website to correct late deposits using our example:
- Principal is the amount of the missed payment ($5,000)
- Loss Date is the payroll check date (2/28/2014)
- Recovery Date is the date that the payroll actually posted to the Plan (3/28/2014)
- Final Payment Date is the date the lost earnings ($17) is deposited to the Plan
Don't forget to tune in next wednesday for another post about the common retirement plan problems and how to fix them. We will be covering Required Contributions, Suitable Investments and Related Companies.
View last week's post on Compensation and Coverage here.
We posted on Eligibility and Entry Problems here.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
