Prior vs. Current year testing

[Guest hpaine]

Can someone confirm this for me:

When performing the ADP/ACP test the following rules apply:

* To determine an HCE, compensation is used from the previous year

* The ADP is taken from current year to determine what the HCE's can contribute

Thanks!

[2muchstress]

An HCE is anyone who owns more than 5% in the current year, or made more than 85k (indexed) in the prior year.

The document should specify if you are using the current year testing method or the prior year testing method. I believe that the current year method is most commonly used, but I have heard others argue differently.

If prior year method is used, then the ADP for the NHCE's in the prior year determines how much the HCE's can contribute in the current year. Thus the allowable contribution rates are known at the beginning of the year.

If current year method is used, then the allowable ADP for the HCE's in the current year depends on the ADP for the NHCE's in the current year.

I hope this is what you were looking for.

[Guest hpaine]

What happens if a majority of the HCE's were laid off in the prior year? Is this a postive aspect for what the HCE's can contribute for 2002? We have a client that is concerned that the HCE's that were laid off in the prior year that their compensation will be used to determine Top-Heavy status for 2002. The client is not understanding that the ADP/ACP is not related to Top-Heavy.

[2muchstress]

Its too hard to tell without looking at the contribution rates for prior years. I just had a plan with 8 hces last year. Four of them contributed and 4 of them did not. The four who did not contributed terminated employment in 2001.

So in 2002, the plan failed ADP because the only HCEs remaining were the ones who contributed.

BTW- this is a 9/30 plan year end.

As far as top heavy goes. Completely different issue.

[Guest hpaine]

Thanks for the information. This does help.

[Blinky the 3-eyed Fish]

2muchstress, not to nitpick, but the ownership determination for HCE's is based on the current and prior year.