Prior Year Method and adding a new Match Contribution

[Guest andmik]

Hello,

Hoping someone might be able to provide me with some insight.

Company has a discretionary match which it has never funded to date. They use Prior Year Method. For 2003 they intend to fund the match. The problem is that with the Prior Year Method, the ACP for NHCEs is 0% for 2002 since they never funded a match. Therefore, it appears that the Match for 2003 will fail ACP and all HCEs will be required to receive a refund of the entire 2003 match.

Since 2003 has closed, it appears that they cannot change methods for 2003 and this causes a problem.

Has anyone run into this? And is anyone aware of a possible solution for this dilemma?

Thanks in advance for your feedback.

Sincerely.

Andmik

[Tom Poje]

you are correct, since plan had match provisions, even though never used, they are out of luck. prior year must be used at it is zero.

now, as regards to if you can change method...

there are no guidelines.

some hold you should be able to change to current year because you can correct an ADP test up to a year after plan year end. so, one could argue a good faith effort allows you to amend after the plan year end.

[Guest Boilerburm]

I mentioned this on another thread on the same topic, but one thing that we have done is to shift eligible deferrals to the match test. If prior NHCE ADP is 4.5, and current year HCE ADP is 5 and HCE ACP is 2.5, you can get all the tests to pass by shifting 1.5 from NHCE ADP to ACP.

Doesn't work in all cases, but it will most likely get you to at least keep some of the match in for the HCEs!

[Guest andmik]

Tom,

Thanks for the quick response and insight. Have you or have you seen other practictioners take the position that it can be changed for the 2003 testing year, after the close of the testing year, but before the testing deadline expires (12/31/04 in this example)?

It seems like a bad result when the employer certainly does not intend to favor HCEs but also certainly does not intend to keep them from the Match altogether.

Thanks,

Andmik

[Tom Poje]

There simply is no guidance. I haven't had the situation arise, but under the guise of 'a good faith effort', I would not be uncomfortable amending plan within a year to change to current. but that is me, others may disagree

[g8r]

I agree with Tom. The IRS is aware of the issue (I know it has come up at various ASPA conferences). They could have addressed it in the proposed 401(k) regs yet they were silent (just like they were silent on the entry date issue when dealing with those under 21/1 YOS). They don't want to address the issue so it's open to a reasonable interpretation of the rules. I don't think you're situation is an abusive situation of changing methods (which is prohibited regardless of when you amend) so I agree with Tom that amending within the statutory correction period is reasonable.