This article originally ran on April 21, 2015.
By Farhad Mirzada, QKA
Editor’s Note: Readers are reminded that the ACP test does not apply to governmental 403(b) plans, nor does it apply to plans sponsored by churches, or qualified church controlled organizations (although non-church 414(e) religious organizations will be subject to those rules when employer contributions are made). All other 403(b) plans sponsors and the financial advisors providing services to them will benefit from this article.
One aspect of 403(b) plans that is not easily understood is the correction deadline for the actual contribution percentage (ACP) non-discrimination test. This article will provide an overview of the penalty-free and statutory deadlines for corrections for failed tests.
It’s past March 15; our ACP testing is not complete! My vendor says that we missed the correction period for a failed test.
As many plan sponsors scramble to get census data in good order to present to vendors or third party administrators (TPAs) in order to complete the required ACP testing that their plans may be subject to, rest assured that the statutory deadline for corrections is a 12-month correction period.
Therefore, the clock starts ticking at the close of the plan year. However, if corrective distributions are made after the first 2½ months (March 15 for calendar-year plans) of the correction period, the plan sponsor is liable for an excise tax of 10% of the principal amount of the excess. Note that this figure is not 10% of the total distribution, since that amount is adjusted for earnings; it is only 10% of the excess unadjusted for earnings.
Years ago, it was relatively rare for plans to complete their testing by the March 15 deadline in order to avoid the 10% penalty, for two reasons:
1. it was difficult to collect testing data, perform the test and make corrective distributions (if applicable) in only 2½ months; and
2. before 2008 corrective distributions issued before March 15 were taxed in the year of the test failure (i.e. the year before distribution), which created difficulties for highly compensated employees who had already filed their prior year tax returns before March.
However, with advances in technology, along with regulatory changes (all corrective distributions are now taxable in the year of receipt); more plan sponsors are now completing ACP testing and any relative corrective distributions by March 15. Nevertheless, the 12-month correction period has not changed and plan sponsors still have time to complete and process any corrective distributions up until the end of the 12-month period.
Once the statutory correction period has passed, employers may still seek relief through the IRS’ Employee Plans Compliance Resolution System (EPCRS). Under the self-correction program (SCP), mistakes must be fixed within two years after the end of the statutory correction period (i.e., the 12-month period following the close of the plan year). After this time, the voluntary correction program (VCP) must be used, unless the failure can be classified as insignificant.
It is important for plan sponsors to be aware of the deadlines for completing non-discrimination tests and making corrections (if applicable).
Plan sponsors should appreciate the importance of providing complete and accurate census data to their vendors and/or TPAs. They should compile census information, including all employees, as soon as possible after the plan year end so the required non-discrimination testing can be performed accurately and any corrective distributions can be made in a timely manner in order to avoid the 10% excise penalty.
Farhad Mirzada is a member of the NTSA Communications Committee and is a Director at Cammack Retirement.
Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment, Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.
Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.