Corrective Distribution Notice
(401(k) Plan)

Summary

Use this Corrective Distribution Notice (401(k) Plan) to inform a plan participant in a non-safe harbor 401(k) plan that they are receiving a corrective distribution from the plan due to a nondiscrimination testing failure or excess deferral for a plan year. This template includes practical guidance, drafting notes, optional clauses, and alternate clauses. The template can be used to explain the following corrective distributions and plan forfeitures: • A return of participant elective deferral amounts (pre-tax and/or designated Roth contributions) that exceed the I.R.C. § 402(g) limit for the prior calendar year (excess deferrals), adjusted for earnings • A return of participant elective deferral amounts, adjusted for earnings, where (1) the participant is a highly compensated employee (HCE) and (2) the plan corrects a failed actual deferral percentage (ADP) test (26 C.F.R. § 1.401(k)-2(a)) by distributing the excess contributions pursuant to 26 C.F.R. § 1.401(k)-2(b)(1)(i)(B). • A return of participant after-tax contributions, adjusted for earnings, where (1) the participant is an HCE, (2) the plan permits after-tax contributions (that are not designated Roth contributions), and (3) the plan corrects a failed actual contribution percentage (ACP) test (26 C.F.R. § 1.401(m)-2(a)) by distributing excess after-tax contributions • A forfeiture of employer matching contribution amounts, adjusted for earnings, that were made with respect to any excess deferrals Alternate language is provided for participants who have received a total distribution from the plan prior to the time of the corrective distribution. Employers must complete corrective distributions for a failed ADP test by March 15 (for a calendar-year plan year) of the year following the testing year to avoid a 10% excise tax and having to file IRS Form 5330 “Return of Excise Taxes Related to Employee Benefit Plans” to report the late corrective distribution. I.R.C. § 4979(f). For example, if a calendar year plan fails testing for the 2019 plan year, the plan must make the corrective distribution by March 15, 2020. For non-calendar year plans, the plan has 2 1/2 months after the end of the plan year being tested to correct excess contributions and avoid the excise tax. A plan that meets the “eligible automatic contribution arrangement” requirements of I.R.C. § 414(w)(3) has six months to complete the distributions. I.R.C. § 4979(f)(1). The plan can distribute excess contributions any time during the 12-month period following the end of the testing year without risking disqualification. However, where the correction isn’t made within 2 1/2 months, the tax will apply (unless, instead of distributing the excess, the plan sponsor allocates corrective qualified nonelective contributions (QNECs) to the accounts of affected employees within 12 months after the end of the plan year (where the plan uses current year testing)). See IRS, 401(k) Plan Fix-It Guide. See EPCRS Correction Rules and Procedures for ways to maintain the plan’s qualified status despite the failure to timely correct. For a broader discussion concerning 401(k) plan nondiscrimination testing, see and Lexis Tax Advisor -- Federal Topical § 1J:24.03. Safe harbor 401(k) plans generally avoid ADP and ACP testing entirely. See Safe Harbor 401(k) Plan Design and Administration. For a full listing of key content covering retirement plan notification requirements, see ERISA Retirement Plan Notices Resource Kit. For a full listing of key content covering EPCRS and VFCP plan corrections, see EPCRS and VFCP Plan Corrections Resource Kit.