prior year ACP testing when zero match in prior year

[Guest DIGMYDOG]

What do you do when you have a plan that has elected prior year testing for ADP ACP and has discretionary match. How do you test if in the prior year the employer elected no match? There would be 0% for both NHCE and HCE...

The next year the employer elects to put match in. If you use prior year testing, the HCE ees would not be able to receive match? That doesn't seem right.

Does anyone know how to handle this? Where would I look this up?

Thanks

[Blinky the 3-eyed Fish]

This is an inherent problem with the prior year testing method, but you can always switch to current year testing.

I smell an amendment to the plan.

[Guest DIGMYDOG]

Okay, so basically if you have a plan that provides a discretionary match it is best to design it so that current testing will be used. Isn't it true that once you switch to current you can't go back to prior for five years. Or am I off base here...

Thanks for your help.

[MWeddell]

We're assuming that a match at one time in the past was made, right?, so that the 3% rule can't be used.

You're right that the solution is to use the current year method and to stay on it for five years (if not permanently).

[Brian Gallagher]

plus, after 5 years, you have to apply to the IRS to make the change to prior and stae your reasons for the switch. they don't necessarily have to grant it.

[R. Butler]

plus, after 5 years, you have to apply to the IRS to make the change to prior and stae your reasons for the switch

What is the cite for that? I've heard that before, but Notice 98-1 specifically states that "Notification to or filing with the Service...is not required in order for the change to be valid." I never actually seen anything that changes that, but again I've heard several people state that a filing is required.

[Brian Gallagher]

maybe it was in the proposed regs? it's nothing i've read either; i've just "heard" it.

[MWeddell]

The proposed regulations don't require IRS permission to switch from the current year to the prior year method after 5 or more consecutive years of using the current year method. Prop. Treas. Reg. 1.401(k)-2©(1).

[Brian Gallagher]

What about Notice 98-1, sextion VII?

Accordingly, a plan is permitted to change from the current year testing method to the prior year testing method in any of the following situations:

1. The plan is not the result of the aggregation of two or more plans, and the current year testing method was used under the plan for each of the 5 plan years preceding the plan year of the change (or if lesser, the number of plan years the plan has been in existence, including years in which the plan was a portion of another plan).

[R. Butler]

What about it?

[Guest Boilerburm]

We've also used the "shifting" method in certain situations. For example, our prior year NHC ADP was 4.5, and our current year HC ADP was 5 and HC ACP was 2.5. By shifting 1.5 from NHC ADP to NHC ACP, both tests were met.

This doesn't work in all cases, but can be used in the right situations.

[Guest CRex]

We are assuming that because the plan provisions allowed for matching contributions that a match contribution has been made in the past thus you cannot use 3% and Prior. Is the answer different if the plan provided for discretionary match but no match has EVER been made? Is it allowable to use prior and 3% in this case?

[R. Butler]

No. The ACP% in the prior year is 0%

[Brian Gallagher]

In my post above, I was responding to MWaddell's post right be fore that--about not requiring permission to change. I fogot to add this section of 98-1. Still Sec VII, but in the initial paragraph.

Section 401(k)(3)(A) provides that if an employer elects to use the current year testing method for purposes of the ADP test, that method may not be changed except as provided by the Secretary