aggressive "shifting" to pass ADP/ACP

[Guest MaryMac]

Looking for some clarification on an action our TPA is proposing to make to correct for a failed ADP and ACP test.

I have read the sections ERISA outline book that explain shifting, and it describes both a conservative position and an aggressive position for shifting. Our TPA proposes to use the aggressive approach. This approach involves first distributing the excess deferrals to make the ADP pass. The next step is to shift percentages of BOTH HCE and NHCE deferrals to the ACP test to make the ACP test pass.

I have to wonder if that more aggressive approach is allowable, since the book I am reading is a bit out of date.

Here is an explanation our TPA gave us. If I understand it, she is calling the conservative approach "Shifting" and the aggressive approach "Optimizing".

"You asked for an explanation about shifting and optimization. Here goes: 1. "Shift" means transfer a percentage point (or fraction of a percentage

point) from its original category of contribution to another category (ADP to ACP for example). Shifting is simply the reassignment of percentage points, not shifting of amounts credited to participants' accounts. Shifting should always be tried first, and used to the greatest permissible extent before going to any other curing approach. 2. If, after shifting, the test still fails, shift from the HCE average and from the NHCE average in one test, the greatest permissible flat percentage, or the flat percentage that will reduce the HCE average in one test to 4 and the NHCE average in the same test to 2 (whichever comes first). This part is called optimization. Like shifting, no money is reclassified in participants' accounts - the points are moved for testing only."

Also curious what anyone thinks of the 2 and 4 in her explanation. Is that statutory? She said it is, but I cannot find a cite to support that.

Thanks in advance!

[MWeddell]

The regulations require that the ADP test pass before elective deferrals may be shifted from the ADP test to the ACP test. It's unclear whether one can use corrective refunds or any other correction method to first get the ADP test to pass and then proceed with shifting. I think this is the point you're summarizing from the ERISA Outline Book. Yes, that's still the current state of things.

Whether you are moving percentage points or dollars doesn't matter if the eligible population is the same for both the ADP and the ACP tests. Any shifting is only for testing purposes.

I've used "shifting" or "optimization" as two terms for the same thing. The regulations don't have a separate mechanism. The reason why one might want to shift all nonhighly compensated employee deferrals above 2.00% and all highly compensated employee deferrals above 4.00% is to maximize the multiple use limit. That's not an issue for plan years beginning in 2002 or later (assuming one timely adopts an EGTRRA good faith amendment).

[GBurns]

If someone claims that an item etc is legal or statutory, the burden is on that person to provide the legal support for their position, not for you to try and find something that you think satisfies what it is that you think that they might have meant.

Get that person to provide the required support.