ADP Testing and Union Employees

[Guest SCUDDESLER]

We administer a 401(k) plan that covers only union employees (some of the union employees are highly compensated by virtue of their compensation). Do we need to run an ADP test? I know this question may sound strange but based on Treas. Reg. Sec. 1.401(k)-1(f)(7), Example 4 (take a look at (iv)), it appears that if the plan fails the ADP test, then all of the deferrals made by union employees will have to be included in their compensation.

The IRS writes, "nless Employer T corrects the ADP test failure in the collectively bargained portion of the plan. . . all elective contributions made by collectively bargained employees for the year will be includible in income. . ." The IRS seems to be saying that a union 401(k) plan automatically satisfies the nondiscrimination test. However, in order for a 401(k) plan to be a qualified CODA (which is apparently a separate issue), it must pass the ADP test (even if it is a union 401(k) plan). I am confused!

Thanks in advance for any thoughts.

[KJohnson]

You are right, ADP testing for a collectively bargained 401(k) is not technically a discrimination issue but a CODA issue. My recollection is that the preamble to the regulations has a good explantion of this.

Therefore you run your ADP test like you normally would and distrbute excess contributions. The one "neat" thing that would seem to work conceptually is if you have a match you may be able to "shift" matching contributions over to your ADP test with impunity. This robbing Peter to pay Paul usually doesn't work very well in other situations, but in a collectively bargained context while you have to run ADP, you get a pass on ACP so who care?