Prior Year Testing and Change in Comp provisions

[Guest Cinco]

If a plan contains the prior year testing method provision and a plan amendment is processed to change the definition of compensation used in the ADP/ACP test, does the prior year test need recalculated with the new definition in order to obtain the ADP/ACP percents to use on the current year test?

Example: Plan amendment in 2006 for compensation provisions (to change from Simplified 415 pay to W-2, or to include only pay while eligible or to exclude fringe benefits from ADP/ACP comp). Do I have to go back to my 2005 test and calculate the 2005 averages using the new definition?

The ERISA Outline Book, 2005 Edition, Chapter 11: 401(k) and 401(m) Testing - Section VI (Performing the ADP test): Part C.2. (Section 414(s) compensation)

2.b.2) says 'yes', but I can't find a regulation to back that up.

Thanks in advace for the help!

[fiona1]

good question...

bumping to see if anyone has an any input...

[rcline46]

Good question! The regs allow you to use any 414s definition of compensation to do your testing, and so do most documents. This means you could run the test using the same definition of comp as you did last year to demonstrate you pass, then rerun the test (pass or fail) to set the values for next year.

It also means you can rerun last year's test using this year's definition to reset the numbers.

However, I think you can just use this year's comp. The regs tell you what to do if the GROUP changes, but not if the comp changes. We just had an audit where we were using a 414s definition for testing and the auditor looked at what we were doing and approved it.

[Tom Poje]

why not try section 414(s), definition of comp.

you know that ADP test requires you to use a definition of comp that satisfies 414(s). and certainly buried somewhere in there is a consistency rule. for example, I could exclude deferrals from testing comp.

now suppose I was using current year testing. would you hold that for HCEs you would test using total comp, and for NHCEs you would use comp less deferrals? both definitions of comp satisfy 414(s), but you still have to apply the same definition to all participants. just because you are using prior year testing method doesn't mean you can get away with using definitions of comp for different folks.