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qka 2 > QKA 2 Unit 5 ADP/ACP Testing Part 2 > Flashcards

QKA 2 Unit 5 ADP/ACP Testing Part 2 Flashcards

1
Q

If the 401(k) arrangement fails the ADP test, there are four corrective methods permitted, which are:

A

1) distribution of excess contributions
2) contributing QNEC’s
3) shifting QMAC’s into the ADP test
4) recharacterization of excess contributions

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2
Q

A failed ADP test must be corrected within. What timeframe?

A

Within 12 months following the close of the plan year

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3
Q

When considering the four possible, ADP failed testing corrections, what is the order in which the corrections should occur?

A

1) the QNEC and shifting of QMAC are applied first

2) if step one was not used or did not fully correct then the plan would proceed with re-characterizing excess contributions if possible

3) then distributing excess contributions

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4
Q

If a plan has an allowance for after tax contributions, then what additional step can be done to correct for a failed ADP/ACP test? What 2 things happen as a result?

A

Excess contributions are re-characterized as after-tax employee contributions.

1) the employee is taxed for the amount re-characterized
2) re-characterized amounts are tested under the ACP test as if they were part of the 401M arrangement

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5
Q

What happens if the ADP test is not corrected within the 12 month timeframe? What is this also called?

What happens going forward?

A

1) The 401(k) arrangement is treated as a non-qualified cash or deferred arrangement.
2) Also called CODA

3) Elective deferral’s made under the CODA are includable in gross income for the year in which they were deferred

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6
Q

For a plan that has failed the ADP test and proceeds forward underneath a CODA, how is the plan tested going forward? What are the ramifications for a failure?

A

Going forward the CODA is tested under the general nondiscrimination requirements of IRC410(a)(4) rather than the ADP test.

Failure to pass the general test would disqualify the plan.

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7
Q

What does EPCRS stand for?

A

Employee plans compliance resolution system

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8
Q

What may a plan do to correct a failed ADP test after the 12 months has expired?

A

Employer can correct the failure through EPCRS

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9
Q

EPCRS programs usually involve more what?

A

Out-of-pocket costs for the employer

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10
Q

If the 401M arrangement fails the ACP test what are the 3 corrective methods permitted?

A

1) Shift Elective Deferrals into the ACP Test
2) distribution or forfeiture of excess aggregate contributions
3) contribution of QNEC or QMAC

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11
Q

Excess aggregate contributions are one of two contributions made on behalf of HCE’s. What could they be?

A

Matching contributions or after tax employee contributions

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12
Q

Of the third possible correction for a failed ACP test; “shifting elective deferral into the ACP test”, the plan must satisfy the following: (2 items)

A

The plan was satisfy the ADP test twice to include the first time with all deferrals, and the second time after deferrals are shifted to satisfy the ACP test

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13
Q

How are vested excess aggregate contributions dealt with?

A

Vested excess aggregate contributions are never forfeited to the plan. They are distributed to the employee.

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14
Q

What are the only types of excess aggregate contributions that can be forfeited to the plan then?

A

Those that are unvested

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15
Q

Is choosing to not allocate the matching contributions due to an HCE under the terms of the plan in order to correct for an ACP violations provided for? And if not why?

A

No, it is not provided for. The match should allocate according to according to the schedule. The HCE should be allocated the match due and then either the excess amount be distributed or forfeited according to the correct correction method.

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16
Q

Do some plans allow for the administrator to adjust an HCE’s after tax deferral percentage mid year
?

A

Yes

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17
Q

Unlike a failed ADP test, if the ACP test is not corrected within the 12 month period, then what happens?

A

The entire plan is disqualified because it is treated as having failed IRC 401(a)4

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18
Q

Are corrections allowed through ECPRS even though they failed ACP test is disqualified?

A

Yes

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19
Q

Even though there is a 12 month period to distribute excess contributions after a failed test what happens if the distribution does not occur within 2 1/2 months?

A

An excise taxes applied

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20
Q

For plans with an EACA, what is the grace period to avoid excise taxes after the end of the year for distributing?

A

Instead of 2 1/2 months, it is six months

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21
Q

What method is used to determine the amount of excess contributions that need to be returned?

A

The leveling method

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22
Q

What are the six steps of the ACP process?

A

Determine the following:
1) whether Current or prior method is used
2) which participants are includable
3) HCEs NHCE groups
4) each employees ACR
5) each groups ACP
6) compare the groups did it pass?

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23
Q

What is the formula to determine the ACR?

A

ACR= Match + after tax contributions / Compensation

24
Q

What is the formula for determining the ACP?

A

ACP = Total ACR for Group / number of participants in group

25
Q

Once you have the ACPs for both groups, what 3 steps/formulas do you use to determine pass or fail?

A

Step 1) take the lesser of the ACP X 2, or the ACP + 2
Step 2) multiply the ACP by 1.25.
Step 3) take the greater of the result of step 1 and step 2

26
Q

What is shifting?

A

Shifting is the concept of either taking contributions from the ADP test and moving them to the ACP test. We’re taking contributions from the ACP test and moving them to the ADP test.

27
Q

What must be in place in order to use shifting?

A

Both the ADP and ACP tests must use the same testing method either current year or prior year.

28
Q

What are the two types of shifts that are allowed for?

A

Counting QMAC contributions in the ADP test

Including elective deferral’s in the ACP test

29
Q

What are the five steps for shifting ADP deferrals into an ACP test?

A

1) ADP test must pass/ ACP test is failing
2) calculate the ADP cushion
3) shift the ADP cushion to the ACP test
4) calculate the new ACRs post deferral shift
5) re-run the ACP test post shift

30
Q

What is the definition of the ADP cushion?

A

It is the amount of excess non-highly compensated employee, deferrals, that are above the minimum passing rate of the test

31
Q

Although the shifting rules permit, the shifting of HCE ADP, should you?

A

No, it is usually not beneficial to do so

32
Q

Can you still shift non-highly compensated employees, ADP, if it does not correct the ACP?

A

The goal of shifting is to either satisfy the test, or at the very least reduce the extent of the failure

33
Q

When are QNECs vested to EEs?
When is a QNEC available to participants under normal plan rules?

A

QNECs are:
100% vested at the time of allocation
not available for distribution until:
Reaching age 59 1/2
Hardship
Birth or adoption
Disability
Death

34
Q

If a QNEC is used to correct either a failed ADP or ACP test, can it be used to cover both?

A

No, it can only be used to cover one or the other

35
Q

What are the four options when it comes to the allocation of QNECs in a 401(k)?

A

1) pro rata to all NHCEs
2) pro rata to NHCEs and HCE’s
3) per capita to all NHCE’s
4) per capita, to NHCEs and NHCE’s

36
Q

What is a pro rata QNEC to all NHCE’s?

A

The contribution is allocated in the same percentage to each NHCE’s compensation for the year

37
Q

Why are QNEC contributions to correct for failed ADP and ACP tests on plans that use prior-year testing method impractical?

A

Because the tests don’t run until after the plan year has ended. The money would’ve been due by the time the test was run.

38
Q

What plans could comfortably use QNECs to correct for testing failures?

A

Current year method plans

39
Q

Describe option three; per capita to all NHCE correction method

A

AQNEC may be made on behalf of NHCE‘s in an amount sufficient to satisfy either the ADP or ACP test. All eligible NHCE‘s are allocated the same dollar amount.

40
Q

Describe option four: per capita to employed NHCE is correct for a failed ADP or ACP test

A

All eligible NHC is employed at the end of the year are allocated the same dollar amount

41
Q

If a corrective distribution is made after the first 2 1/2 months, but before the end of the 12 month, correction. The Employer will incur a what percentage excise tax?

A

10%

42
Q

EACA plans are allowed to extend a 2 1/2 months to how many months to avoid the excise tax for return of excess contribution?

A

Six months

43
Q

What are the four steps for determining the refund amount?

A

1) use leveling method based on ADR to determine correction amount
2) apportion total correction amount to eligible HCE’s are using the leveling method based on deferrals
3) recharacterize, corrective Distributions towards on used catch-up contributions
4) apply allocable earnings to the refund amount

44
Q

To describe the First Step in Determining the Refund Amount using the leveling method, we reduce the HCE, with the highest ADR, by the smallest amount, needed until either:

Once the max pass in ADP is reached, what do you do as the final step in step one?

A

1) the total HCE ADP is equal to the plans max passing ADP

2) the next HCEs ADR, then repeat the first step until the max passing ADP is reached

Total up the correction amount from the leveled HCE’s

45
Q

In the second step of returning excess contributions using the leveling method, what is the process?

A

1) arrange the HCE account in descending order by 401(k) deferral and start with the largest deferral
2) reduce the largest deferral by the minimum amount needed to reduce that To match the second highest deferral, or satisfy the total distribution.
3) continue to follow this process until the total correction amount is realized

46
Q

Describe the process of step three in satisfying a failed ADP/ACP test

A

If the plan permits, catch up contributions, determine what amount can be recharacterize for HCEs required to take a distribution who are eligible

47
Q

Can an HCE elect to receive a distribution rather than have funds re-characterized as catch-up contributions?

A

No if the HCE is eligible for catch-up contributions, and they still have funding capacity in catch-up, then the excess contributions must be re-classified

48
Q

In step number four what is the alternate formula for computing allocable earnings for the ADP test?

A

Allocable Earnings = Earnings X (excess contributions / account balance attributed to elective deferrals)

49
Q

What is a Alternate Formula for computing allocable earnings for the ACP test regardless of what stated in the plan document?

A

Allocable Earnings = Earnings X (excess aggregate contributions for the year / account balance attributable to ER Match + after tax EE Contributions)

50
Q

When determining allocable earnings, we round up to the nearest what?

A

Dollar

51
Q

In Step 4 of correct in the allocable earnings of the refund amount for the ACP test what are two minor differences?

A

1) there is no catch up

2) only the vested portion of the matches refunded, the nonvested part is forfeited

52
Q

ADP or ACP refunds are taxable to the Participant in which year?

A

They are taxable to the participant in the year that they are received by the participant

53
Q

The 10% penalty tax under IRC 72 t for premature Distributions is not applicable to corrective Distributions, true or false?

A

True it does not apply

54
Q

The corrective distribution counts towards satisfying a required, minimum distribution, true or false

A

False, a corrective Distribution does not count is an RMD

55
Q

What percentage of federal income taxes withheld from a distribution of excess contribution?

A

10%

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