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New statutory exclusion regulations for ADP/ACP testing

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We are trying to research the new regulations regarding statutory exclusions for ADP/ACP testing for plan years beginning after 12/31/98;

1. Am I correct in understanding that the new rule is an alternative, but does not replace the previous method of testing (performing two tests; one on the group of employees who meet statutory eligibility, and another test for the group of 'otherwise excludable employees')? May an employer elect to use either rule for testing, even after the remedial amendment period?

2. Allocation of QNECs for a plan using the new statutory exclusion rule. If a plan uses the new statutory exclusion rule for their 1999 plan year test and chooses to make a QNEC to correct a failed test, would the QNEC only be allocated to those NHCs who meet the statutory eligibility requirements?

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1. YES. The new regs are an option. I am not sure why one would want to run two tests, but what the heck.

(The actual wording of the regs says something to the effect 'NHCEs who fail to meet the statutory exclusions MAY be excluded from the test...') (Emphasis mine.)

Had to look it up the other day for a plan.

2. All the documents I have seen, do not say

"A QNEC will be given only to those NHCEs included in the statutory includable group"

but rather "QNEC will be allocated to ALL NHCEs..."

so I don't think you can get out of that one. It would not appear you couldn't write a document that way, it should be no different than using a bottom up QNEC where only certain NHCEs receive, but I doubt your document says that.

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Tom,I believe there may be an advantage to performing two tests. If I understand correctly, based on the 1999 ASPA IRS Q&A #76, you can take entry dates into account if you test separately but cannot do so if you just exclude NHCEs. Depending on the situation, testing separately may improve test results.

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Donna, I agree with your analysis of the ASPA IRS Q&A. It seems like if an employer wants to use the entry date exclusions, they must use the pre-1999 rules and run two tests.

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I agree with the above points.

Just to clarify, there are no regulations on the new post-1998 testing option. Code Section 401(k)(3)(F) and the parallel cite in 401(m) are the only official pieces of guidance available.

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