Top 20% HCE

[Guest ehayes]

I have a 401K plan that failed the ADP test for 2002. I have amended the plan

for GUST prior to 12-31-02 and did not include the option to have only the top 20% of HCE's to be included in ADP test. Is it possible to make a retoactive amendment to elect the top 20% rule since this will result in significantly better result for the test. Also, does the amount being returned to HCE's due to plan failing ADP test have to include losses if the HCE's accounts lost money during the plan year.

[Blinky the 3-eyed Fish]

When the top paid group election is allowed to be made is a point of debate right now, as there is no clear guidance. Issues arise if people move from HCE status to NHCE status or vice versa, causing them or other participants to receive less of a benefit than they otherwise earned.

In your case making the top paid election would cause people to move from HCE to NHCE status. So, you have to ask yourself while considering all contribution sources, would this cause a cutback in contributions earned? If the answer is no, then I would feel comfortable making the change at this time.

In answer to your second question, yes. You will also need to know how to calculate the losses and to follow your document if addressed in there.