prior year testing

[Guest good2brich]

The company I work for has over 100 employees. We have a 401(k) and use the prior year method. According to the ADP/ACP report for the year 2002, we failed the test and refunded money to the owners. As I understand it, the ADP for 2002(4%) will be used to determine whether we pass the ADP test for 2003.

Our TPA now says the ADP for the employees is 6% because the law allows us to exclude those employees who have not been with the company for at least 1 year.

Based on the 6% we would pass in 2003. It does not seem right to me. Our 2002 report says the ADP is 4% and now he says its 6%. I am confused.

[R. Butler]

If you test "otherwise excludables" separately for coverage, you disregard NHCE "otherwise excludables" from the ADP/ACP. So the TPA maybe correct. But be careful, if you didn't test "otherwise excludbales" separately last year, special rules may apply due to a change in coverage.

I bet it is nice being rich.

[Guest good2brich]

thanks for the information. However, I never said I was rich. My username just says that it is good 2 b rich. And it is.

[Blinky the 3-eyed Fish]

Tell that to Kurt Cobain.

[stephen]

Could it be that now the TPA is adding the 2% allowable (greater of 2x not to exceed +2, or 1.25x) thus the ADP for the NHCE's of 4% plus 2% allowed = 6%? Therefore they pass.

[Tom Poje]

no one explained the logic / reason behind this exclusion.

It appears your plan has immediate eligibility (or something similar)

By law, the maximum wait is one year.

So what has happened, your plan, being more generous than it has to, has brought in a lot of people it didn't need to.

And usually, the first year someone works, they don't defer, therefore you have a bunch of zeroes on the test, which only hurts things. so the govt allows you to test all people with less than 1 year separately.

[Brian Gallagher]

way off topic but:

Is it good to "Rich" as in your name is Rich(ard)?

Or good to be rich as in having a lot of money?

[Guest good2brich]

The screen name is Good2brich, as in its good to be rich. I am not, however it is good to be rich or so I imagine.

Back to the issue at hand....our plan calls for 3 months service. Based on the 2002 ADP report, the ADP of the employees to be used in 2003 is apprx 4%. To my knowledge, they tested all employees with 3 mos service to arrive at the 4%.

Now they are saying that we pass the ADP test for the 2003 year in based on an ADP of 6%. When we questioned the TPA, they claim that they are allowed to exlcude anyone who does not have 1yr of service and anyone who is not 21. This is apparently a change from last years report. I do not know if it makes a difference, but we are using the TPAs Non-Standardized Prototype.

[Brian Gallagher]

Who says you can't go back and redo a test and disaggregate? A report that was run with the 4% doesn't have to be the ultimate end product. Who's to say later that the plan could be disaggregated?

[R. Butler]

My name is Richard. its probably no better to be Rich than Tom or Brian. It may be alittle better than being Blinky the 3 eyed fish because I don't have to worry about being somebody's dinner.

Back to your question, ask your TPA to show you last years calculations. Per my initial post the TPA very well could be correct.

They should be able to show you if they tested otherwise excludables separate last year and they should be able to show you prior year numbers based on separate tests. They should be able to tell you if any special coverage rules apply.

The answer to your question is that the TPA could be correct. I can tell you the rules, but you can't provide enough information on this board for me to give you a definitive answer.

[Tom Poje]

perhaps a simple example will help

Company has 2 NHCEs, one has only worked less than a year.

testing results are as follows:

ADP %

NHCE 1 (worked more than 1 year) 6

NHCE 2 (worked less than 1 year) 0

Average for 2 nhces is 3%

however, there is an option (doesn't matter what the document says) to test employees with less than a year by themselves. In effect, this eliminates the NHCE with 0.

Therefore the average is now 6%

Based on your comments, it sounds like your situation is ok, simply that an option is being taken advantage of. It might not always be the case. Suppose NHCE 2

deferred 10%. then it would be better to test the numbers combined.

hope that helps

[jquazza]

I say trust your TPA. You pay them for a reason. No one here has enough information to tell you whether your test was performed properly.

The fact is there are rules that allow you to exclude from the test participants who would not have been participants had the eligility requirements of the plan been more stringent.

Did somebody say you can always sue the TPA if he made a mistake???

That's not true, TPAs cannot be sued...nor do they ever make mistakes...