Current year testing vs. prior year

[FJR]

I'm sure this has been discussed before, but would appreciate any comments.

Starting a 401(k) plan mid year(2001) and making the effective date 1-1-2001. This is a small group consisting of husband & wife with 3 ee's. The Husband makes well over the 170K limit. If the enrollment does not get done until late in year and lets assume none of the ee's participate, we can assume a 3% for the NHCE and therfore the husband & wife can contribute an average of 5%. Assume no Match.

My question is, can we use current year testing in 2002 or do we use prior year testing? Does the assumption of using the 3% average constitute prior year?

Thanks!

[stephen]

You cannot use the "deemed 3%" for the second year of ADP testing. You must use the actual NHCE numbers from the first year. (Chapter 11 Section XII G.1.f p 11.258 of the ERISA Outline Book 2001 Version)

Have you considered setting up Safe Harbor 401(k) using 3% non-elective 100% vested contribution?

[FJR]

If you use the deemed 3% for 2001, can you use current year testing in 2002?

I thought we were too late for safe harbor for 2001 if we make the effective date 1-1-01

[Tom Poje]

the effective date of the plan can be 1/1, but the safe harbor portion is based on the date when employees can first defer.

[wmyer]

To answer the original question, using the deemed 3% in the first year does not constitute an election of prior year ADP testing, so you can still use current year testing in the second plan year.

I agree with Tom about the effective dates. If you do not currently have a 401(k) provision and if your new plan is not a successor plan, you have until October 1 to add a safe harbor.

[Richard Anderson]

Don't forget that this plan is top heavy and all plan participants still employed at year end must receive the top heavy minimum contribution.

Small plans like this work very well as Safe Harbor; since a 3% contribution must be given as top heavy anyway, the safe harbor contribution just makes that 3% contribution 100% vested. Of course there are other requirements as well for a Safe Harbor 401k.

And now, it seems that the safe harbor match will satisfy the TH contribution requirements also.

[Earl]

The SH match satisfies the TH only if there are no other contributions, i believe. So careful if there are any other contributions.

[wmyer]

Just a clarification to Earl's post -- the Safe Harbor only seems to automically satisfy top-heavy if there's just the SHMAC and 401(k). But under EGTRA, the SHMAC will still count towards the minimum contribution even if there are additional contributions in the plan. By the way, do you think enhanced SHMAC and 401(k) automatically satisfy top-heavy if there are no other contributions?

[Bob R]

If you look at the statute in detail, any plan that only provides SH contributions and deferrals satisfies top-heavy. So, the 3% non-elective w/no other contributions satisfies top-heavy. Likewise, an enhanced match satisfies top-heavy. And, a plan w/the 3% SH non-elective with a regular match (subject to vesting schedule, etc.) satisfies top-heavy as long as match satisfies ACP SH (e.g., doesn't take into account deferrals over 6% of comp and, if discretionary match, doesn't exceed 4% of comp).

I've seen some misleading outlines on EGTRRA, but, again, look at the statute. You won't find anything in the statute that singles out just basic SH matching contributions.