EPCRS Correction
Rev. 11/20/09; E-mail Alert 2009-18

Rev. Proc. 2008-50, the most recent Employee Plans Compliance Resolution System (EPCRS), provides the correction methods for handling a plan in which a failed ADP/ACP test is not corrected in a timely manner. 

Regulations require that corrective action for a failed ADP/ACP test must be taken within the 12-month period following the end of the plan year for which the test is performed.  During this time, the employer can remedy a test failure by either making qualified nonelective contributions (QNECs) to the nonhighly compensated employees (NHCEs) or by issuing refunds to the highly compensated employees (HCEs).  A failed ADP/ACP test that is not corrected within 12 months after the end of the plan year is a plan disqualification issue and the correction procedures for this are found in EPCRS.

Note that the correction process, including the 12 month correction timeframe must be written into a plan document. Since this is written in the document, if the document is not followed, it is an operational failure.  Within two years after the end of the plan year during which the failed test should be corrected, this failure is permitted to be corrected under the Self Correction Program (SCP). For example, a calendar year plan being tested for 2008 must be corrected by December 31, 2009. If not corrected, then the self correction must be made by December 31, 2011. After that a Voluntary Correction Program (VCP) submission may be made.  Rev. Proc. 2008-50 details two acceptable options for remedying this type of failure: 

• Contribute QNECs to NHCEs, OR
• The one-to-one correction method.

QNECs, Rev. Proc. 2008-50 Appendix A.03
The employer contributes qualified nonelective contributions (QNECs) on behalf of nonhighly compensated employees to the extent necessary to raise the ADP or ACP of the NHCEs to the percentage needed to pass the test(s). For more details on this method click here for EPCRS and see Appendix A, Section 03 on page 69.

One-to-One Correction Method, Rev. Proc. 2008-50 Appendix B, Section 2.01(1)(b)
The one-to-one correction method involves issuing refunds (and/or forfeitures) to correct the failed test(s), plus earnings since the refund should have been made to the HCEs. In addition, the same amount refunded (and/or forfeited) — plus earnings — is to be contributed as a QNEC and allocated to NHCEs. Below are the steps for correcting a failed test using the one-to-one correction method:

• Excess ADP/ACP refund amounts are calculated, and are adjusted for earnings. 
• Excess amounts are distributed to the HCEs, or forfeited from their accounts as appropriate. 
• The employer makes a QNEC contribution to the plan’s NHCEs equal to the total dollar amount issued to the HCEs and/or forfeited from their accounts. 
  Note: Related matching contributions that become excess amounts as a result of being associated with excess deferrals must be forfeited, but are not taken into account for determining QNEC amounts.

QNEC amounts will count as annual additions for the year relating to the QNEC contribution, therefore 415 limits will need to be considered when calculating the amount of QNECs due.

For many more details on this process, click here for EPCRS and see pages 79 to 82.

Form 1099-R reporting
Excess amounts are not eligible rollover distributions

• 1099-R is issued for the year of the distribution
• The total amount of distribution is reported in boxes 1 and 2a
• Leave box 5 blank, and enter Code 8 in box 7

Corrections to HCEs that have already received a distribution
Additional steps may also need to be taken if an HCE that is due to receive a refund has terminated and already received a distribution from the plan which is now required to be reported as a distribution due to an excess contribution, rather than as it had been reported.

Bill Grossman, ERPA, QPA