Short Plan Year and ADP/ACP Testing

[J. Bringhurst]

We have just been informed that a client failed their ADP/ACP/MUT tests for the 2000 plan year. The Plan is a prototype document originally effective July 1, 1999; it is drafted to use the current year testing method.

1. Since we are still in the remedial amendment period for prototype plans, can the Plan be amended to use the prior year method?

2. If so, how are HCEs/NHCEs determined for the prior short plan year (July - December)? Are compensation amounts extrapolated or do we use the prior 12-month period?

Thanks...any help would be greatly appreciated. If there is any specific guidance on this, I'd also be happy to just be pointed in the right direction...

[Tom Poje]

Compensation is never prorated in determining HCE. The law is clear on that one, it is the prior twelve month period (or in the case of an off calendar year, I guess you could make a calendar year election to make your life easier - but it is still 12 months.)

[MWeddell]

I agree with the above response. To answer your other question, yes you may amend the plan to switch between the current and prior year testing method because you're still in the GUST remedial amendment period. Note that the method you choose for the last year of the GUST remedial amendment period will affect your ability to switch methods in the future.

[Guest LKHartnett]

May I just add that in using prior year testing, you look at deferral percentages of compensation actually earned in that short plan year. So, for instance, you use your 12 month look-back period compensation for determining your HCEs, but you use short plan year compensation for determining your ADP/ACP.

[J. Bringhurst]

Thanks to all who responded!