Prior year testing for 1st Year 401(k) Plan

[Guest AdminFL]

1st year 401(k) Plan, no NHCEs defer. HCE's defer 5%. Is it ok to use 3% (prior year) to pass ADP & ACP Tests? I can't think of a reason not to.

[Mike Preston]

The only reason not to would be if it were not appropriate to do so. The IRS has intimated that the method of testing must be specified in the plan. The IRS has not made it clear when this specification must take place, and whether, once it is in place, it can be changed.

The conservative view is that one must decide on the testing methodology before the beginning of the year!

In the case of a new plan that would be on the date it is adopted, assuming it is adopted after the first day of the year.

Nobody knows to what extent the normal 401(B) RAP will enable a plan to be amended.

My suggestion is that if one wishes to make an amendment to the testing method after the beginning of the year that the amendment be submitted to the IRS for approval.