ADP - No NHCE's - Prior Year Method

[fiona1]

Let's say a plan has no NHCE's for 1/1/2003 to 12/31/2003. They are deemed to satisfy the ADP test.

They hire a NHCE in 2004, and must now complete an ADP test for 1/1/2004 to 12/31/2004. If they use the Prior Year Testing method, what 2003 NHCE average would they use?

[fiona1]

I think I found my own answer in the ERISA Outline book.

If the plan uses the prior year testing method, does the plan have one more year that it is deemed to pass? Since there are no eligible NHCs for the prior plan year, and the prior year testing method requires the plan to use prior year NHC data to perform the test, is the deemed pass rule applicable? This issue is not addressed by the IRS in the current guidance on the prior year testing method found in Notice 98-1, but the proposed regulations issued on July 17, 2003, say the determination of whether this deemed pass rule is satisfied is made in the prior plan year. Thus, if the plan uses the prior year testing method and, in the prior plan year, the only eligible employees were HCEs, the plan is deemed to pass the ADP test (or ACT test, if applicable) for the current plan year.

[pmacduff]

fiona1 - I found your thread and another and agree with everyone that if there are no NHCE in the prior year and you use prior year testing, you can use the exemption. I have a different issue. Plan uses prior year testing. In 2003 used prior year testing - no NHCEs in 2002. In 2003, one NCHE that can be statutorily excluded. (Plan eligibility is 1 month of service for deferrals.) So - if I statutorily exlude the NHCE in 2003, does that help me for 2004? I'm thinking no - because you only get the exemption if there were no NHCEs. In my case, there was a NHCE in 2003 he was tested separately in the ADP as a statutory exclusion, but was a participant nonetheless. I know I'm probably grasping here.....what do you think?

[pmacduff]

I think I too found my own answer... in an "old" (2000) thread. It used the example if your prior year NHCE ADP was 3.0% and you used statutory exclusions that year; then the following year you don't add those se back in and reduce the 3.0%. I think the same would follow if you only had one NHCE who was statutorily excluded in the prior year - so no NHCEs in the test. I think the HCE gets a pass. I'm still not 100% convinced but getting closer...............