ADP/ACP testing

[betheeg]

Can a 401(k) plan simply add the matching contributions (100% immediate vesting provided) to the employee deferrals and just run an ADP test?

Thanks for any advice....

[Tom Poje]

no. they must be QMACs, as opposed to a match that is 100% vested. one difference between the 2 would be distributions restrictions on the QMAc that aren't on the match

[betheeg]

so if in fact it was an an employer match contribution that was made, it needs an ACP test.

1 more question about ADP testing. Can you run the ADP test excluding employees that have worked less than 1 YOS when in fact those employees are eligible immediately upon hire?

Thanks, Tom.

[Tom Poje]

employees who could have been excluded from the plan if the plan enforced the maximum statutory requirements (age 21/1 year service) can be tested separately. (not excluded from testing)

HCEs it is your choice whether to test separately or not.

the only issue is what 'entry date' do you use for the exclusion.

At conferences IRS official have leaned toward 1st day of plan year or 6 months after 1 year svc/age 21, which would correspond to the code. thus in a calendar year plan an ee hired 3/1/2005, even though he entered immediately could have been excluded from the plan as late as 9/1/2006. thus, in 2006 if he quit 8/20/06 he never would have entered and therefore would be tested in the otherwise excludable group.

[betheeg]

Back to the adding matching contributions to the deferrals and just running an ADP test. I am auditing a plan that is doing this and the TPA is saying that it can be done. She faxed me the definition of "elective contribution" which says "In additon, the Employer matching contribution which is used to satisfy the ADP tests and any EMployer QNEC which is used to satisfy the ADP test shall be considered an Elective Contribution for purposes of the plan. Any contributions deemed to be Elective Contributions (whether or not used to satisfy the ADP or ACP tests) shall further be required to satisfy the nondicrim requirements of regs 401(k) and 401(m)." The tpa noted that this is not a reclassification of match in order to pass ADP. SHe is saying that since the match is defined as an Elective contribution, than it can be tested in ADP.

I trust what you say but how to explain this to the tpa?

Thanks so much for the help.

[Disco Stu]

...the definition of "elective contribution" which says "In additon, the Employer matching contribution which is used to satisfy the ADP tests and any EMployer QNEC which is used to satisfy the ADP test shall be considered an Elective Contribution for purposes of the plan. Any contributions deemed to be Elective Contributions (whether or not used to satisfy the ADP or ACP tests) shall further be required to satisfy the nondicrim requirements of regs 401(k) and 401(m)."

If the TPA isn't reclassifying or shifting ACP testing dollars over into ADP, they must be considering the employer contribution a QNEC. Here are a few follow-up questions you can pose to the TPA. Have her show you the appropriate pages from the plan doc or adoption agreement.

Does the plan allow for a QNEC?

In what manner is the QNEC allocated?

Is this the same manner that the match is allocated?

Which participants are allowed to share in the allocation of a QNEC?

Are these the same people that are allow to share in the match? Often HCEs are excluded from QNECs.

It's possible that the TPA correctly handled the testing, but I'm pretty skeptical. The fact that the match is fully vested does not necessarily make it a QNEC.

[betheeg]

Thanks for the response, Disco. But the tpa is saying that the contribution is a match, not a QNEC. She is saying that since it is 100% vested and defined as an "elective Contribution" that the match can be tested in with the ADP. Tom says that can only be done if the contribution is a QMAC, and I've never known him to be wrong. But then I get this explanation from the tpa and the definition of "elective contribution" is confusing to me. Any other help?

[rcline46]

In order to be able to use the 'match' in the ADP test, it must be 100% vested AND subject to the same distribution restrictions as the elective deferrals. This is the definition of a QMAC.

However, maybe the TPA is using the 'shifting' technique and not actually including the match in the ADP numbers. Now the match must still be 100% vested to 'shift' some of the percents to the ADP, but in this step I don't recall that the match must be a QMAC.

[Tom Poje]

1.401(k)-2 describes what may be used in the ADP test.

just looking at the headers

1.401(k)-2(a)(4) Elective contributions (and definitions are found in 1.401(k)-6 - elective contributions are different than matching contributions)

1.401(k)-2(a)(5) Elective contributions not taken into account (e.g catch up contributions, shifted

1.401(k)-2(a)(6) QNECS and QMACs

nowhere in the above does it say match may be used in the ADP test. nowhere does it say 'if match is 100% vested can it be used in the ADP test'. Thus you also wouldn't use the match of someone who has been there 6 years (his match is 100% vested at that point in time)

again, refer to the definitions found in 1.401(k)-6.

A QMAC must be 100% vested AND subject to the distribution requirements [of a deferral] when made.

If the match is defined as 'an elective contribution' in the document then I would say you could use it in the ADP test - but you better not allow any type of in service withdrawals either. It sounds like it may indeed be a QMAC.