date for conducting ADP/ACP testing

[lexi]

we have a KSOP plan with 3 components: elective deferrals, matching and profit sharing.

with respect to the ESOP portion, what date does one use in conducting ADP/ACP testing (i.e., can you pick any day of the plan year to conduct testing)?

my thought is that, b/c all of the investments are self-directed, youcould have very different investment levels b/w HCEs and NHCEs on any given day of the year.

any thoughts?

[QDROphile]

What do investments have to do with ADP testing?

[lexi]

the participants can move investments around at will.

so which day do you pick to do testing (we are worried about HCEs/NHCEs).

[WDIK]

As QDROphile points out, it appears that you are misapplying some terms and/or concepts. Please be more specific.

[Guest Harry O]

I think the issue is that you (used to) have separate plans for ADP and ACP purposes - the KSOP which was typically just the employer stock fund and the rest of the plan. The old rules required you to test the ESOP and non-ESOP portions separately. The problem for certain plans was that employees would defer into the KSOP stock fund and their deferrals would buy employer stock. But the same employee could then sell these shares and move his money into another investment which would now be in the non-ESOP part of the plan. Now you are at year end and have to do the ADP test - which part of the plan counts the employee deferral: the ESOP portion because that is where the money originally started or the non-ESOP part because that is where the deferral ended up at year end?

But I thought that the mandatory disaggregation rule for ESOPs and non-ESOPs was eliminated for ADP and ACP testing purposes in 2006?

[lexi]

Yes, Harry O, you are definitely correct that mandatory disaggregation no longer applies after 2006. So does that mean that we test everything together (ESOP portion and 401(k) portion) and pick the method that ensures that we don't fail discriminating in favor of HCEs?

[QDROphile]

This may not apply to you personally, so don't take it personally. It looks like the ESOP setup was not understood or thought out in the first place and it is likely that the testing prior to 2006 was bungled. Your plan document probably suffers the same disabilities and will be of no help, but the plan document could have made all of this very clear and prevented problems both before and after 2006. You need help from someone who understands basic concepts and can see through the ESOP clouds. For example, a contribution is a contribution is a contribution, and a contribution is not an investment. Your comment about "pick the method" is curious, bordering on scary. Take solace in the fact that everyone, including the IRS, has bought into the floating ESOP scam, mostly without thinking through the consequences and issues, so it will be difficult to hold your plan to task for the common shortcomings. That is no excuse for noncompliance now, especially with the relief provided by the new 401(k) regulations.

[lexi]

QDROphile, you are right about the plan not being well thought-out and lord only knows what has been going on.

my only solace is that the plan can be tested as a solitary unit.

[lexi]

QDRO: as a follow up, can you point me to any literature that outlines the proper tax treatment of these "floating ESOPs." these seem a little too cute for me, but i would be interested in what other (more learned people than i) think.