Still Confused Over ACP Testing

[Guest lbach]

I am running 2001 ACP testing. Even though our 403(B) allows employees to participate immediately, if I understand it correctly, I can exclude those nonhighly compensated employees who are under 21 and have less than one year of service when running the ACP test. We use current year testing, so I am still confused as to what I would do with those highly compensated employees who are hired in 2001, but have no income in 2000. I would have to include them, but how?? Could you help me? I'm really confused!

[Mike Preston]

Can you provide specifics of who might be hired in 2001 and be an HCE? I think you will find that unless someone is a 5% owner, they can't be an HCE in 2001 if they weren't employed in 2000.

Does that solve your problem?

[Guest lbach]

Thanks! The problem is that the Code says to only exclude NH Compensated Employees who are under 21 and 1 year of service, but in reality, when you test, you have to exclude Highly Compensated as well since you look at 2000 compensation when you choose current year testing and the "new" 2001 Highly Compensated people have "0" compensation for 2000. We don't have any 5% owners. This seems very strange to me.

[Mike Preston]

I think it is a fairer description to say that you include "highly compensated" but that you don't include "Highly Compensated"! Confusing, I know, but that is the way it is. Or, at least, that is the way it is NOW.

You should be aware that you don't "have" to exclude "Highly Compensated" employees, either. The provision in question, 401(k)(3)(F) is permissive, not required, and ends up allowing the plan sponsor three choices as to ADP testing:

1) Normal. Just test everybody.

2) Apply 410(B)(4)(B) the way it existed before 401(k)(3)F) was added. If the employer makes this choice, then you ignore whether someone is a highly compensated employee or not. You test two separate groups. Group 1 consists of those that meet statutory eligibility. Group 2 consists of those that don't. If you happen to have an HCE in Group 2 (which we've already discovered will usually only happen if one is a 5% owner), then you include that HCE in Group 2's test. Of course, the results for Group 2 aren't likely to work out too well, so Congress gave us.....

3) Finally, one can not only apply 410(B)(4)(B), but one can use the special language of 401(k)(3)(F). If the employer makes this choice, you move the HCE's that are in Group 2 above and test them with those in Group 1. In this manner, even if you happen to have a 5% owner, you have the ability to test that person with the people who meet the 21/1 requirement.

[Richard Anderson]

Are 403(B) plans subject to ADP testing?

[Mike Preston]

Good point. It always helps to remember the context of the original question, doesn't it? In this case, I fell into the trap of assuming the follow-ups were dealing with a 401(k) plan, rather than a 403(B) arrangement.

So, the answer is no, they aren't (at the moment). But they are subject to 401(m). So, just change my references from 401(k)(3)(F) to 401(m)(5)©. Same result, though.

[MWeddell]

I don't mean to be picky, but just to clarify things ...

You may exclude nonhighly compensated employees who are under age 21 OR have not earned a year of service. It's an "or" not an "and" in terms of who you may exclude.

[Mike Preston]

I don't think I used "and" or "or". I would reword it slightly to say that one excludes those in both categories. That is, if you answer true to either of the following questions, that person would be in what I've defined as Group 2:

1) Did that person have less than 1 year of service as of the end of the plan year being tested?

2) Was that person under age 21 as of the end of the plan year being tested?

While we are in the process of being picky (which I think is generally a good thing), I should point out that there is a difference between statutory eligibility associated with general 410(B)/401(a)(4) testing and statutory eligibility under these sections of 401(k)(3) and 401(m)(5).

In the case of 401(k) and 401(m) one tests for statutory eligibility as of the last day of the plan year without consideration of entry dates. In the case of 410(B)/401(a)(4) one tests for statutory eligibility as of the last day of the plan year with consideration of entry dates. Hence, in a calendar year plan, testing for 2001 would put somebody full-time hired on 7/2/2000 in Group 2 in a 410(B)/401(a)(4) test but they are in Group 1 for a test under 401(k)/401(m).

[MWeddell]

I was talking about the second sentence in lbach's first posting. If one is excluding employees, then exclude those < age 21 and exclude those < 1 year of service.