Plans normally require that related matching contributions are forfeited if corrections are necessary as a result of failing the ADP test. But, would the following scenario affect this requirement such that forfeitures are not necessary?

A plan contains a match formula of 50% of deferrals up to max of 9% of eligible compensation. The plan fails the 1999 ADP test and refunds are processed (ACP test passes). Refunds are only necessary and distributed to participants who reached the '99 402(g) limit of $10,000 (and, some of these participants were paid comp in excess of the 401(a)(17) limit). If the ADP refund was small (less than $100 including allocable earnings), can an argument be made that a participant who deferred 9% (matched at 4.5% of comp) does not need to have match forfeited since his or her match only represents 3.13% ($5,000 match/$160,000 comp) of comp, less than the plan's maximum match of 4.5%? Or must the match on the deferral refunded be forfeited, no matter what percentage of comp it represents? I think what makes this result different than in prior years was most HCEs receiving refunds were those just over HCE comp limit and not those whose comp exceeded 401(a)(17). Your thoughts?

Interesting post, KB. Your argument can be made, but you're skating on thin ice and I just don't see a benefit to the client substantial enough for running this compliance risk.

The reason why the hanging match if is forfeited is because you don't want HCEs to have a higher rate of matching contributions (considering only contributions left in the plan after ADP/ACP testing, considering only compensation not exceeding the 401(a)(17) limit) because giving one or more HCEs a higher matching rate than any NHCEs enjoy would constitute a discriminatory benefit, right, or feature. Your argument is that the rate of match is match divided by compensation, but it could also be match divided by elective deferrals, right? Read Treas. Reg. 1.401(a)(4)-4(e)(3)(iii)(G) where the IRS mentions elective deferrals for no reason other than apparently it might affect how one computes a match rate. Add to that IRS pronouncements about the hanging match problem (from the prefatory discussion to the 1994 401(k) regulations I think) and I think your argument is too risky for me to endorse.