ADP/ACP Prior Year Testing Method

[fiona1]

Here's the scenario:

This is the first year that matching contributions were made. So last years 12/31/02 nondiscrimination testing did not involve an ACP test.

Matching contributions were made in the 2003 plan year however, so an ACP test will be done. What will be used for the prior year test percent? Will it be 0% or the default of 3%? I'm thinking that the 3% can only be used for a new plan in their first year of testing.

Has anyone come across this? thanks for the help.

[Blinky the 3-eyed Fish]

It's 0%. This topic has been discussed many times on these message boards, so yes, others have had this problem too.

Consider switching to current year or have a big failure in the 2003 testing.

[fiona1]

Thanks for the reply.

What about the wording in Notice 98-1 that says:

Section 401(k)(3)(E) provides that, for the first plan year of any plan (other than a successor plan) that uses the prior year testing method, the ADP for NHCEs for the prior year is 3%, or, if the employer elects, is the ADP for NHCEs for that first plan year. For this purpose, the "first plan year" of any plan is the first year in which the plan, within the meaning of section 414(l), is or includes a section 401(k) plan (i.e., the first year a plan provides for elective contributions described in section 1.401(k)- 1(g)(3)). However, a plan does not have a first plan year if for such plan year the plan is aggregated under section 1.401(k)-1(g)(11) with any other plan that was or that included a section 401(k) plan in the prior year.

Section 401(m)(3) provides that rules similar to the rules of section 401(k)(3)(E) shall apply for purposes of the ACP test. For purposes of the ACP test, the "first plan year" of any plan is the first year in which a plan, within the meaning of section 414(l), is or includes a section 401(m) plan (i.e., the first year a plan provides for employee contributions described in section 1.401(m)- 1(f)(6) or matching contributions described in section 1.401(m)- 1(f)(12), or both). However, a plan does not have a first plan year if for such plan year the plan is aggregated for purposes of section 1.401(m)-1(g)(14) with any other plan that was or that included a section 401(m) plan in the prior year.

This wording looks to me like the first year that the plan provides for employee contributions can use the 3%. Does the fact that they had match provisions, even though never used, not count as the "first year" ?

[R. Butler]

Did the matching provision exist in the prior year & a mtach just wasn't made? If so then this isn't the 1st plan year & as fish boy says prior year is 0%.

[austin3515]

That's correct. That would only work if the match provision never existed and the match was all of a sudden added.

I'm not sure who designed the plan but we've just discussed is why you should never ERVER use PY testing with a discretionary match.

However, as Blinky the Three Eyed Fish brilliantly points out you can always switch to current year testing whenever you like (there's restrictions and complications on changing from CY to PY.), provided the amendments are made in a timely manner (a plan amendment is required to switch testing methods). So if you're testing a 12/31/03 plan, it may be too late (in fact it probably is), and you're back to the orignal problem.

Also, you do not need to use the same method (i.e., CY/PY) for match and deferrals. So you can switch the match to CY, and leave the deferrals on PY testing.

[Blinky the 3-eyed Fish]

So if you're testing a 12/31/03 plan, it may be too late (in fact it probably is), and you're back to the orignal problem.

It is actually not known if you are too late or not because there is NO STINKIN' GUIDANCE! And being a fish, I know stink!

Amending the plan to current year testing for 2003 at this time would be aggressive, but not necessarily a 411(d)(6) violation.

[austin3515]

I was thinking along the lines of an amendment has to be adopted by the last day of the plan year??

Is there a loophole that will let you adopt an amendment today for a 12/31/03 plan year?

[Guest Boilerburm]

Consider shifting deferrals for testing purposes to your Match test. If you have room on your deferrals, you may be able to get some match in.

[Blinky the 3-eyed Fish]

Austin, why is the last day of the plan year your drop dead date? Why is adopting the amendment after the end of the year requiring a loophole?

Think of why the amendment may or may not be permissible and the answer is 411(d)(6). The argument that an amendment changing the testing year is a violation of this statute is that the NHCE's have earned the requirements to receive a QMAC to make the test pass. Amending the plan would reduce the QMAC.

The argument that it is permissible to make the amendment after the plan year is that HCE's would return dollars, and the amendment is just reducing their returns.

But no guidance means go with your gut.

[austin3515]

I thought the "remedial amendment period" ended on the last day of the plan year.

I don't have time to fish out a reference (i think its 401(b)), but I'm definitely interested to know if amendments can be processed after year end.

Can I amend a plan year ended two years ago? Where's the cut-off?

[R. Butler]

I thought the "remedial amendment period" ended on the last day of the plan year.

I don't have time to fish out a reference (i think its 401(b)), but I'm definitely interested to know if amendments can be processed after year end.

Can I amend a plan year ended two years ago? Where's the cut-off?

Forget about the remedial amendment period for a minute. Why do you say it has to be done by the end of the year? Its a 411(d)(6)issue. Are participants losing a benefit by having the plan amended after year-end? Arguably no.

I can see a valid arguement that the plan could be amended all the up to 1 year after the close of the plan year because you can make refunds all the way up to that point.

[austin3515]

Now I know I'm confused...

I just realized that if a plan fails coverage they would be required to amend the plan retroactively in order to pass coverage.

Does someone have somthing they can point me to that is a good resource on when certain plan amendments are required? I have the ERISA outline book (2003) byut I couldn't specifically find anything that clarified things for me.

Wasn't there anything that had to be adopted by year end? I think it was EGTRRA amendments, right? IF you wanted to add catch-up contributions or whatever else, you had to amend before the end of the year (i.e., goodfaith amendments). I know this was extended until the end of the GUST remedial amendment period...

What amendments must be done before the plan year ends (i.e, adding a new 401(k)? What can be done after the year ends (i.e., amendment to correct coverage violations or 401(a)(4) violations).

Can I amend the plan in March of 2004, effective 1/1/03 to accellerate the vesting schedule?

Hopefully this demonstrates the source of my confusion adequately!

Thanks,

[Blinky the 3-eyed Fish]

Austin, your question is way too broad. When you can amend the plan depends entirely on the purpose and scope of the amendment. Knowing things like 411(d)(6), 412©(8), 1.401(a)(4)-11(g) and 404 (somewhere) spell out deadlines for some of the different applications.

So, if I just were to answer your last question. Consider this. By accelerating the vesting schedule retroactively, what is happening? The answer is that participants vesting percentages are increased. No problem there.

But, what you also may be doing is decreasing forfeiture dollars. That would be a problem if the document calls for the forfeitures to be added to the contribution. Then you are taking away from what participants already earned.

So, you see in this case there are a couple of things to consider.

[austin3515]

Actually, I think your answer was exactly what I was looking for, which is that the timing of the amendment depends on the amendment desired.

I was looking for a chapter entitled Plan Amendments which I was hoping would say when I can and can't do certain amendment (some very simple guidelines). Your point is well taken that it depends on the amendment... nothing is ever straightforward in this world...

I am glad to know that there is more latitude regarding amendments after the Plan Year has ended...

Thanks,

[§#$%!]

I just called the IRS about amending the testing method from prior-year to current-year for plan year 2003. According to the agent, the deadline to amend the plan under IRC 401(b) is the tax filing deadline for the company.

I specifically mentioned that this amendment is for a post-remedial period.

I haven't completely read 1.401(b), but it sounded as if it wasn't a big concern to the agent. I'm still concerned that it's still too aggressive.

Any further thoughts?