Safe Harbor Plans - ADP/ACP Testing Method

[Leopurrd]

Hi everyone,

Am I correct in thinking that any plans with a Safe Harbor contribution must default to current year testing for ADP/ACP? (note: I realize that you don't have to test for these plans except in cases where the safe harbor is not followed/deposited).

I have a colleague that says otherwise regarding this issue.

FYI, it's a prototype document, but I don't think that makes any difference.

Thanks!!!!

Vicki

[Archimage]

You are correct. See Treas. Reg. 1.401(k)-2©(1)(i).

[Leopurrd]

Archimage, thanks for your reply.

Must this current year election be stated in the document? I know that non-safe harbor plans must state their testing method, but what about safe harbor plans? I'm asking because I've always been told in the past to check the current year box when drafting documents, but now I've been told that we can elect prior year, and the plan will automatically default to current because of the regs??

If this is true, what about the change in testing method rule, where you have to be on current for 5 years before switching back to prior? if the plan goes safe harbor and then must test, this locks them into current. so why check the prior year box anyway?

Sorry if I'm not making complete sense, but what was posed to me doesn't make sense, and it's continuing to spiral on.....

Thanks again for your help!

Vicki

[Tom Poje]

you make perfect sense.

my understand is once you go safe harbor, you are indeed on the 5 year cycle before you can switch back.

I actually asked one of the Corbel document people about whether it mattered what you checked for testing since the default is 'current' year. The document software lets you select either, it will print whatever you select, but the response was that you really should select current year.

the final regs also say (in regards to a plan that uses 'maybe SHNEQ') "a plan that provides for the use of the current year testing method may be amended after the first day of the plan year...no more than 30 days before plan year end ..... to adopt the safe harbor method... 1.401(k)-3(f)

so I would try to make sure the document does indeed say current year testing.

[BG5150]

Is the 5-year "widow" mandatory? I seem to remember that there is a provision to apply to the IRS to switch before the 5-yr period is up.

And, if it's a prototype, doesn't the plan doc specify what method is used?

(Bear with me, I've been out of the business for a year and a half, and I'm just getting back into it, so a lot of stuff has slipped my mind...)

[Leopurrd]

Tom - Thanks for your reply. I agree with you on the subject, but I think its a losing battle for me here! At least I know the fundamentals of the testing

BG - If I'm remembering correctly, you didn't have to worry about the 5 year window during the GUST restatement period. But once the GUST period ended you were locked for the 5 year period if you used current (since you can always switch from prior to current since you never overlap data that way).

Yes, you are correct that a prototype specifies testing, which is why I was so confused on the matter of a safe harbor plan with prior year testing!

I'm just hoping we never have to actually test this plan Thanks again for all the replies!

Vicki

[PMC]

Back to the original post - if the plan has a safe harbor contribution but also includes a match that doesn't satisfy ACP safe harbor can the plan use prior year for the non- safe harbor match? Under the pre-'04 final regs. seemed like no. But under the new regs. seems like yes. 1.401(m)-2©(1) states if the Plan satisfies Safe Harbor for ACP under 1.401(m)-3 then must use current year. However, for a Match that doesn't satisfy ACP Safe Harbor, 1.401(m)-2©(3) states can use current or prior year for ACP regardless of what is used for ADP. But if that is done, then it limits the plan with regards to recharacterization, shifting deferrals to ACP and use of QMACs. So even though permissible, may not be a good idea.

[Guest HiKidsImASrPensionAdmin]

Since it is on a prototype document, I do not believe that you can specify different testing methods for ADP and ACP. If you select CY, it is going to be CY for both tests. Likewise, if you select PY it will be for both tests.

[Leopurrd]

Actually, I believe the recent final 401(k) regs allow a prototype to have two different testing methods...

But I'm still curious about the ACP test for contributions that do not meet the safe harbor!

[Guest jae3207]

The ACP test must use the current year testing method, as outlined in Section VIII.F.2-3 of Revenue Ruling 98-52. I could not find anything in the final 401(k)/(m) Regulations which would supercede:

2. Matching Contributions that Fail to

Satisfy the ACP Test Safe Harbor

If a plan satisfies the ADP test safe harbor

of section V.A, but fails to satisfy the

ACP test safe harbor with respect to

matching contributions under the plan,

then the plan must satisfy the ACP test in

the manner described in paragraph 3 of

this section VIII.F.

3. Special Rules for ACP Test

If paragraph 1 or 2 of this section

VIII.F applies, then the plan must satisfy

the ACP test under § 401(m)(2), and

under § 1.401(m)–1(b), as modified by

Notices 97–2 and 98–1, using the current

year testing method.

[PMC]

The concepts/provisions of Notices 98-52 and 2000-3 are included int the Final 401(k) Regs. and those Regs. supercede those Notices. Whether it was an oversight on the IRS part, I don't think the Regs. require current year testing for a non-ACP Safe Harbor contribution which is part of a Safe Harbor plan (ADP). 1.401(m)-2©(3).

When reading the 2006 ERISA Outline Book, we noticed this apparent discrepancy between the Notices and the Final Regs., notified Sal and he was going to check with Treasury whether the change in the final Regs. was an oversight.

[Guest jae3207]

What about the provisions for current year testing in Regulation 1.401(m)-3(h)(iv)? I know that it refers to amending the plan to reduce or eliminate safe harbor matching contributions, but it does refer current year testing for the nonsafe harbor match acp test.

Thoughts??