Does the excise tax on late refunds applicable if the plan is also making a 1-to-1 QNEC to satisfy the 2006 ADP test?

If so, on what year's 5330 do I report it? '06 or '08?

Thanks in advance.

We recently had this come up under audit. The IRS auditor required the client do the 1 to 1 deposit plus earnings, and pay the excise tax for each of the 3 years that the refund was late.

That's interesting. I find it odd that a plan sponsor would have to pay the tax for each year the refunds are late. There is nothing in Rev Proc 2006-27 about whether the excise tax is applicable or not. However, this is addressed in the ERISA Outline Book - Chapter 15, Section VI.

(ii) Excise tax on excess amounts being distributed. Note that excess amounts which are distributed under this correction method are subject to the excise tax under IRC §4979, which is payable by the employer. The excise tax applies to corrective distributions under the ADP test or ACP test that are made more than 2½ months after the close of the plan year for which the failure occurs. The IRS does not normally waive these excise taxes merely because the employer is using the relief programs under EPCRS. However, as part of a VCP filing, a plan sponsor may request a waiver of the IRC §4979 and provide an explanation supporting the request. See section 6.09(4) of the EPCRS Procedure.

I agree that it was totally unexpected -- but we didn't want to annoy the auditor and tempt her to disqualify the plan!

TAG suggested to do it for 2008 only.

The excise tax can be waived only if requested in a VCP filing and if a good reason is given for the ADP failure. Since there can be a self-correction of ADP failures under the regs and EPCRS, the excise tax is often forgotten. If there was not a voluntary VCP filed--and here it looks like the issue was raised on audit--then that's why the excise tax applied.