ACP question

[fiona1]

401(k) plan w/ a match. There is an hours requirement and active at last day of the plan year requirement for the match.

There are 5 participants who are not on the ACP test because they do not satisfy the match requirements, therefore they are not eligible for the match and are not included in the ACP test. They ARE however, included in the ADP test.

Assume the ADP passes and the ACP fails. One option is to shift deferrals from the ADP to the ACP. If this shifting is done, is it okay to keep the 5 participants above off the ACP test?

Since we're now including deferrals on the ACP test and these deferrals do not have a requirement, I'm wondering if these 5 people need to be included on the ACP test.

Any thoughts?

[MWeddell]

Only "eligible employees" are included in the ACP test. Looking at the that definition from Treas. Reg. 1.401(m)-5, seems to me that these five individuals aren't eligible. (I'm assuming that your plan doesn't permit employees to make after-tax contributions.)

If you're shifting elective deferrals from the ADP test to the ACP test, that action wouldn't affect the above conclusion.

[Tom Poje]

under the old regs it was clear you were able to shift different amounts (or %) for different people. there was no reuirement that you treat everyone equally.

the new regs 'imply' that is still the case.

I would agree it doesn't seem to make sense to use deferrals from those that are not in the ACP test.

however, there is certainly nothing to stop you from shifting a larger amount from the other NHCEs to the ACP test. I suppose if the numbers were just right you could still fail, but without seeing an actual case I wouldn't know.

good question and observation.

[pmacduff]

Ok - I'm new to "shifting" so bear with me please...

I have a plan that fails ADP, only 1 HCE and he's over 50, so the refund amount is recharacterized as catchup. Now; the ACP also fails by a very small amount so I wanted to shift some ADP to ACP. The ERISA Outline Book says I can only shift if the ADP test passes both before and after the shift so...

will this work in my situation or am I out of luck?

Thanks in advance!!

[FormsRstillmylife]

We looked at this question and concluded that the activity necessary to identify the catchup contribution did not constitute an ADP failure. Once the catchup contribution was properly identified and removed, the ADP passed. Thus, elective deferrals could be shifted to the ACP.

[Tom Poje]

the 2006 edition of the ERISA Outline book says

"the plan may NOT apply the recharacterization rule first, and the determine how it wants to shift elective deferrals to produce different testing results. All testing must be completed, including the shifting of elective deferrals if desired, before determining whether there are any remaining excess contributions that would be distributable under IRC 401(k)(8)(C ) but are eligible for recharacterization as catch-up contributions." (page 11.220 2006 edition)

I think what the first sentence says is that you wouldn't run the ADP test first. figure out some catch up amounts. then shift, causing the plan to pass ACP but fail ADP. then determine additional amounts as catch ups. That makes sense to me because the 'ADP test' has now gone through the 'leveling' method to determine how much refund was needed.

Therefore I think the second sentence says go ahead and run both the ADP before and after any shift to determine the catch up. or put another way, calculate enough 'extra' catch up that the plan easily passes the initial ADP test. Then shift, and lo and behold the plan still passes the ADP test.

but I could be reading that incorrectly.

[pmacduff]

Thank you for the replys.

Tom I see what you are saying...my edition of the ERISA Outline book is a few years old, and that was where I read that the ADP must pass both "prior to" AND "after" shifting. I was stumbling there because I was thinking that my catchup contributions aren't really catchups until my ADP fails.

I have plenty of "wiggle room" for the catchup in this plan, and I need to shift less than 1% from ADP to ACP in order for the ACP to pass. ADP then passes also (again with catchup recharacterization, but alittle bit more than intially).

I'm gathering that I'm ok on this one and the HCE need not forfeit any match...

Thanks again!