ADP/ACP Prior Year Method

[fiona1]

Ok - 2 plans aggregating for testing. One plan is a 401K for salaried employees and the other is a 401K for hourly employees. Both 1/1 plan years.

For the 12/31/03 test, no ACP was done because the hourly plan had no match, and the salary plan had a discretionary match that was not funded.

The hourly plan added a discretionary match in 2004. That plan will be able to use 3% as the NHC prior year percent. If the salary plan makes a discretionary match, they'll have to use 0% as the prior year % since they've had the match, but have never funded it.

So how does this work if the plans aggregate for testing? What prior year percent will be used? Thanks for any help!

[fiona1]

Did I stump y'all? My guess would be a weighted average of 3% and 0% - but not positive.

[Guest hyper]

I am stumbling over the 3% rule. I can't remember if it has any restrictions about when it can be used. I thought maybe it was restricted to the first plan year, not the first play year a matching contribution was made.

Assuming you can use the 3% rule, I think these two plans would be treated just like two plans that had made contributions in the prior year. Maybe I missed something.

The prior year ACP is 3% for the hourly EE's and 0% for the salaried EE's. You determine the ACP for the aggregated group just like you would any other year.

[fiona1]

Concerning the 3% rule, I'm pretty sure that the first plan year for purposes of the ACP test is the first plan year in which the plan allows employee contributions or matching contributions under Code Section 401(m).

[Guest hyper]

Well, it took me a minute (well more like 1/2 hr.) but I found it. The last sentence of 401(m)(3)(B) says rules similar to the rules of 401(k)(3)(E) apply for purposes of such section.

401(k)(3)(E) says you can only use the 3% rule in the "first plan year of any plan".

So I think it would be aggressive to use the 3% rule in a year that is not the first plan year. I think you are stuck with an ACP of 0% for the prior year.

[Tom Poje]

well, I don't know how many 'points' any of you get for your 'conclusions. maybe some partial credit.

lets see what Notice 98-1 says. In particualr the second paragraph of section V!!!!!!!!!

Looks like it says adding a match feature gives you the right to use 3% BUT only if you don't aggregate with another plan that had a match faeture in the prior year.

V. FIRST PLAN YEAR RULE UNDER PRIOR YEAR TESTING METHOD

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.

For purposes of this notice, a plan is a "successor plan" if 50% or more of the eligible employees for the first plan year were eligible employees under another section 401(k) plan (or section 401(m) plan, as applicable) maintained by the employer in the prior year. For example, in 1998, Employer H sponsors Plan T, a section 401(k) plan. In 1999, Employer H establishes Plan U, also a section 401(k) plan, which had 200 eligible employees, including 100 employees who were eligible employees under Plan T in 1998. Plan U is a successor plan.

If a plan (other than a successor plan) uses the prior year testing method and for its first plan year the plan determines the ADP or ACP for NHCEs for the prior plan year using the ADP or ACP for NHCEs for that first plan year (in lieu of 3%), then the use of the prior year testing method in the next testing year is not treated as a change in testing method. Such a plan would not be subject to the limitations on double counting described in section VII.B. for that next testing year. If a successor plan uses the prior year testing method for its first plan year, the ADP and ACP for NHCEs for the prior year are determined under the rules in section V of this notice.

[Guest hyper]

Thanks Tom, correct conclusion but incomplete research is never good.

[fiona1]

Thanks Tom.

Which scenario do you think is correct:

1) Both plans must use 0% as the prior year percentage - therefore 0% is used as the prior year percent for the aggregated test.

2) 98-1 is just saying you can't use the 3% and first year plan rule for the aggregated test? In other words, the prior year test percentage for the aggregated test can't be 3%. Therefore you'd use 3% for one plan, 0% for the other, and it would use the weighted average of 3% and 0%.

[Tom Poje]

I read it to say there is no 'first plan year' if you aggregate with another plan.

simply SOL, you have a bunch of people at 0.

(I would be the first to admit my guess would have been you would have used 3% and then use a weighted average, but then looking it up.....)

is there a reason the plans have to be aggregated?

[fiona1]

Thanks again Tom.

Looks like they're aggregating to pass coverage, so they need to aggregate ADP/ACP.

I found the following in the Internal Revenue Manual, which pretty much says what 98-1 says:

4.72.3.6.1.2.2 (03-01-2002)

First-Year Rule for Prior Year Testing

For ACP testing purposes, the "first plan year" is the first year in which the plan provides for employee or matching contributions. A plan does not have a first plan year if for that year it is aggregated under the regulations with any other plan that provided for employee or matching contributions in the prior year.

Appreciate it.