Plan with HCEs only

[MBCarey]

One of my plans sold one of their divisions this year. Now the only people left in the plan are all highly compensated. We have always use prior year testing for the ADP test and plan to do so in 2004, but after that there will be no NHCE's to look back at.

How does this affect testing? Will the plan still be subject to ADP? The plan is top heavy so I know that the employer will always have to give the 3% to all non-key employees in order to defer, but I am not sure what I need to do as far as telling them what their max. deferral amt/percentage would be.

Sorry to ask what is probably a goofy questions.

Marybeth

[Tom Poje]

A plan with only HCEs is deemed to pass.

Interesting question.

According to the big E book(11.269, 2003 edition), the determination of whether all eligible ees are HCEs is based on the current year, since this relates to coverage testing. Prior year testing is simply a means of calculating the ADP of NHCs to determine if plan passes for the current year.

That would seem to say in 2004, no nhces, so you get free ride even though there was a prior year nhce amount! or at least if I understand the argument correctly

implications are that if no nhces in prior year, but there are in the current year, you don't get a free ride but are stuck with current year testing!

hardly a goofy question following all that logic.

[Mike Preston]

Tom, I'm not sure I agree with the answer. I agree it is an interesting question.

My take on it would be that you would need to change to current year testing in order to get the free pass.

[Blinky the 3-eyed Fish]

Mike, I would have otherwise agreed with Tom's conclusion, so I am curious as to why the testing method would matter when you only have HCE's? It seems like a free pass situation to me regardless of the testing method. For both prior and current testing methods, if the plan continues to have no NCHE's, their testing percentage is nonexistent.

[Tom Poje]

Blinky:

I think the problem is that if you don't amend to current year testing, you end up with the situation of never using the NHCE results. (e.g. if the prior year results were real low for the NHCEs then you have circumvented the sytem using this logic)

the reg cited is 1.401(k)-1(b)(2)(i)(B)

"an arrangement does not fail to satisfy...merely because all of the eligible employees under an arangement for a year are highly compensated"

I understand Sal's argument. It just seems strange, probably more so as a result of the fact this reg was written before the ability to use prior year testing.

personally, to be safe, I think I would amend to current year.

[Mike Preston]

Why isn't it clear on its face? If you are using prior year testing, the limitations on the HCE's in the current year are based on the deferrals of the NHCE's in the prior year. If the prior year's ADP for NHCE's was x%, then the HCE's are limited in the current year to the appropriate percentage based on an NHCE percentage of x. I don't understand where it is written that if the number of NHCE's in the current year drops to zero that a plan using the prior year testing method can automatically modify x.

Maybe I'm not understanding something.

[Blinky the 3-eyed Fish]

We have always use prior year testing for the ADP test and plan to do so in 2004, but after that there will be no NHCE's to look back at.

Note the question relates to 2005, when there are no NHCE's to look back upon for 2004. Thus no NHCE's in 2004 and none in 2005. What would be the difference as to which testing method is used?

[Alf]

I read the question as relating to 2004. Is everyone correct, then?? 2005 is too easy since there were no HCEs in 2004. Mike is correct for 2004, which has to be what the question is about. No 2004 HCE's but nondiscrimination testing looks at NHCE info for 2003 (last year there were NHCEs) and the HCEs will be limited unless current year method is elected.

[MBCarey]

Can we amend the plan now to use current year testing in 2004? There were deferrals by the NHCE's in 2003 so even though there are none in 2004, using prior year will limit the HC's deferral amount.

[Mike Preston]

I would like to claim that I'm clever enough to have sussed out the real question, but until the last post, Blinky was right. The original post was about 2005 and I was answering it as if it were asking about 2004. So, I agree with Alf. Everyone appears correct. Certainly Blinky has been all along and I agree that there is no difference in 2005 as to whether the plan uses current or prior as long as there are no NHCE's in either 2004 or 2005.

Now, after the last post, it appears that the issue is indeed 2004 so I stand by my originally incorrect, but now correct, response!

[Blinky the 3-eyed Fish]

I think we should all use the word "sussed" more often.

[MBCarey]

Ok guys, not sure what "sussed" really means, but I think my original question was regarding 2005, but then as I read your post, I gathered that if I changed the testing from prior to current 22 for 2004, I would not have to look back at the NHCE's that deferred prior to their being sold in 2003 and limit my HC's.

Can I amend the plan now to use current year instead of prior year for 2004?

I really am not trying to confuse you all.

Marybeth

[Tom Poje]

no one knows for sure (unless it is buried in the proposed regs somewhere.)

Sal argues for as late as 12 months after the end of the plan year because that is the time limit for correcting an ADP failure.

but then he adds that IRS has indicated that future regs may require 1st day of plan year for which changes takes effect.

so what's a body to do?

I don't know - are we still in the restatement period, if so, then that is the easy way to go.

.........

I still find this one real interesting.

the schedule T you will check 'the employer employs only HCEs'

which is Sal's argument 'ah, then you pass'