When performing a top-heavy test, if active HCE's have received refunds due to failed ADP (and ACP) tests in the past 5 years, do these amounts count as distributions for calculating the top-heavy ratio or can they be excluded?

Also, if, as of the date of the test it has been determined that some HCE's will need refunds due to a failed ADP or ACP test, can those amounts that will be refunded be excluded from their account balances for purposes of calculating the top-heavy ratio?

I have followed the philosophy that if it counts as an annual addition it is counted in the balance. Then apply that rule to 401(k), 401(m), 402(g) and 415 refunds.

We follow the same philosophy as Hans Moleman.

http://benefitslink.com/boards/index.php?showtopic=9007

http://benefitslink.com/boards/index.php?showtopic=8208

Looks like some prior posts from Tom Poje also agree with this position.

Sal Tripodi's ERISA book (1.293) says it isn't clear how corrective distributions under a 401k/401m arrangement are treated in the top heavy ratio. However it is reasonable to include a corrective distribution if it is treated as an annual addition...which would apply to excess amounts distributed to correct nondiscrimination test but not to a excess deferral under 402(g) if distributed by 4/15 deadline.

Thank you everyone for your input. I agree completely but have a question.

I understand the tax issue associated with refunds for a failed ADP test by April 15 (when it is included in income and if there is an excise tax due).

Where has the IRS indicated that if excess deferrals under 402(g) are distributed by April 15 that they are not annual additions but if distributed later they are?

Thanks

Reg. 1.415-6(B)(2)(i)

Sorry, make that 6(B)(1)(i)