ADP/ACP Testing

[Guest David_R]

My accounting firm purchased 6 other accounting firms several years ago - and all 7 firms have their own qualified 401(k) plan. On November 1, 2001 we are merging all 7 plans into a brand new plan. My question is how do I handle the year 2001 adp/acp tests. For example, how do I consider my highly comp. ees, do I perform a short plan year test for each of the 7 plans and then another short plan year test for the new plan. What if I want to use the prior year method for my nonhighly comp. average percentages, etc. Any help or guidance would be appreciated. Also, does anyone know where I can read about this type of stuff. Let me know. Thanks a million!

[Guest UKH]

There are 3 options available when merger takes place other than the first date of the Plan year.

1) Option 1 - Test plans as single plan for entire year.

IRS prefers this method especially if the plan years of the two plans involved in the merger are the same. This option only works if the Plans have the same Plan year.

2) Option 2 - Test one plan on a termination basis.

In this method the "terminating" plan runs its ADP test with respect to its "short plan year" that ends on the date of the merger. The merged Plan would run a test for the full Plan year taking into account all the employees who would have been available to participate in the Plan as of the merger date.

3) Option 3 - Test both plans on termination basis and merged plan as "new" plan.

This method would involve a lot of separate testing. Both plans being merged are treated as terminated and tested for the plan year ending on the termination date. The merged plan would be treated as a new plan as of the merger date and a separate ADP/ACP test would need to be performed. If you were to use this approach you would basically have to run two ADP/ACP tests.

You may read about these options in detail in the 2001 edition of "The ERISA Outline Book" by Sal L. Tripodi. The author does a very good job in explaining the different options with examples. Hope this helps you!