ADP and ACP Testing Option

[Guest kmvr]

Does a plan have to specify in the plan document that it uses the early participation exclusion option in IRC 401(k)(3)(F) or 401(m)(5)© in order to make use of those options in performing the ADP and ACP tests?

[Guest anagpal]

Yes for sure.

[Tom Poje]

not quite sure what is really being asked.

are you talking about eligible for an allocation (e.g. match or safe harbor contribution) then yes - or are you talking about testing?

if for testing, then no, you could include otherwise excludables in testing one year and test separately in a different year, though if you are using prior year testing you have to be extremely careful.

remember, technically step 1 is coverage testing. if you test seperately, then you MUST test seperately for the ADP test. but there is no requirement for coverage to specify in the document what your testing options will be.

[Guest kmvr]

We are interested in the testing options available to us. The Plan covers employees under 21 and with less than 1 year of service, but the Plan document does not specifically exclude these employees from the ADP and ACP tests. May we perform the tests by excluding these employees?

[Archimage]

I believe Tom answered your question in the prior post. Please be more specific about what you don't understand so we can answer your questions.

[MWeddell]

I say "it depends" but the IRS might say "yes."

If the plan document says relatively little about the 401(k) & 401(m) tests other than the plan must comply and specify if the current year method is elected or the top 20% group HCE rule is elected, then there shouldn't be a problem. The fact that IRS regulations specifically require that the latter two items be in the plan imples that the 21 & 1 rule doesn't have to be in the plan. (This matches Tom Poje's answer I believe.)

On the other hand, if the plan goes into more detail about the test and doesn't mention treating the < 21 or < 1 group any differently, than in order to administer the plan in accordance with the document, you may not be able to take advantage of that rule.

However, I'm aware of one IRS field representative who recently told one of our clients that the 21 & 1 rule always must be in the plan document before it could be utilized. I don't think it's right, but thought you should know that at least some IRS folks are asserting that position.