27 Reasons to use current year testing

[Guest Tbrown]

Someone in my office asked me about this document this morning and I wasn't familiar with it so I told them I would try to locate it. I'm not even sure who produced it. All that they can remember is it being called "27 Reasons to Use Current Year Testing." Does this sound familiar to anyone?

Thanks,

Tim

[J2D2]

I've seen it and may have a copy tucked away in my files somewhere. I'll try to dig it out. Don't remember where it came from or who drafted it.

[Guest pensionquestioner]

I think i have that article - can i email it to you- I'm obviously a pack rat and kee evrything!!!

[KJohnson]

It was written by Cheryl Morgan. The website where it was posted is not up any more. It is also not on her website that I cold find. I have a copy in a subject file and would be happy to fax it to you. Send me an e-mail with your fax number.

[Guest pensionquestioner]

I think I have this - I'm a pack rat obviously- do you want me to email it to you- I can do that with a document- just let me know--- thanks

[Harwood]

I got this from Joan Gucciardi after one of her 1999 presentations.

An article by Cheryl Morgan giving details was due to appear in the Autumn 1999 issue of The Journal of Pension Benefits.

27REASON.DOC

[Tom Poje]

I remember that article well. Harwood is correct- the article did indeed appear in the Journal of Pension Benefits of Autumn 1999. I almost wrote one 'why I disagree with most of the points'

About the only point I could truly agree with is that if plan uses a discretionary you are almost stuck with using current year, especially if client doesn't make a match one year. On the other hand, I have had very few plans (if any) where this has occurred.

Ditto for QNECs. I think I have only one client that ever wanted to use the QNEC option. generally they are just too expensive.

Example, from the article:

point #1 said

"The current year method almost always produces better results than the prior year method (meaning that the ADP for the NHCEs is usually greater under the current year method than under the prior year method...)"

I question that statement. I have never seen any proof for that. My experience is that it simply varies from year to year, maybe around a happy medium. But to say the NHCE avg is almost always higher each year???? By that argument, if the avg is only .5 higher than the prior year, a plan that had an avg of 2.00 10 years ago, should be at 7.00 right now.

Perhaps I am in the minority, but I still prefer prior method.

At the busy crunch time in the early part of the year, I only have to get the comp and deferrals on the HCEs and I am done. I don't have to worry about the NHCE data at that moment in time. And therefore I can run the test a lot easier before 2 1/2 months are up.

Perhaps the smartest client I had deferred up to the 402(g) limit each year, and simply accepted whatever refund he received. End result: that meant he deferred the maximum he could into the plan each year. In that case it wouldn't matter what method was used.

[Guest Tbrown]

Thank you all very much. I appreciate your responses. I tend to agree with you Tom about disputing many or even most of them. Which is one of the projects we are working on. I'm a big fan of doing just as your ideal client did. Defer everything and take back what you have to. I have always told clients to go ahead and fail and take refunds. I've never had a client not go along with that if I explain to them the benefits.

Thanks again.

Tim

[Blinky the 3-eyed Fish]

I think Cheryl's website is not up anymore because she was defrocked for that article and is now a real estate agent. Just kidding, but I agree with Tom's thoughts.

Although, has anyone run an analysis of the benefits of deferring the max knowing the plan will fail versus the extra TPA costs to prep the refund?

[jquazza]

I never really understood the sponsor who want to avoid a failing test by all means, to me if you're plan is not failing, that means (most of the time) that the HCEs aren't deferring as much as they could.

The argument about the discretionary match on a prior year method though valid could be easily set aside by selecting the prior year method for ADP and current for ACP.

[KJohnson]

Of course jquazza's fix doesn't work for the vast majority of plans that are on a prototype.

[Tom Poje]

plus (if I remember correctly) it would eliminate any possibility of the shift of deferrals, but he does have a valid point administrators should possibly consider for plans with a discretionary match.

[Kirk Maldonado]

I have just reviewed Cheryl's article and my reaction to it is that many of the reasons that she mentions really do not relate to whether the plan uses the prior year or the current year methodology. Rather, they are comments stating that the plans need to increase the contributions by the NHCEs and providing some approaches that can be taken to achieve that result.