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EP Examination Process Guide - Section 9 - Participant Rights - Plan Events - When an IRC 401(k) Plan Fails the ADP/ACP Tests

When an IRC 401(k) plan fails the actual deferral percentage (ADP) test or actual contribution percentage (ACP) test, the plan administrator should issue a notice of correction letter to all affected highly compensated employees and, when applicable, a notice that a corrective distribution is being made.

Letter Explaining Corrective Distribution

Description: If the plan corrects the tests via distributions, the plan sponsor will send the participant a letter that describes the refund process and any taxability issues. The participant will also receive a check for the amount of the distribution and a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Amount of the Distribution: The Form 1099-R amount will include the returned contributions and any income earned on that amount.

Timing: Beginning in 2009, if a retirement plan distributes any excess contributions or excess aggregate contributions, along with earnings thereon, the distribution must be reported on Form 1099-R as taxable to the recipient in the year of distribution.

Who Is Responsible For Sending It: The administrator of the plan.

Page Last Reviewed or Updated: 19-Sep-2013