more prior year testing ?...

[pmacduff]

ok -here's the situation: Plan has 1 month eligibility & uses prior year testing. NHCEs ADP was 2.5% in 2005, HCEs ADP was 5.00% in 2006, so far so good.

NHCEs who were contributing termed in 2005. More NHCEs became eligible in 2006 (after 1 month) but are not contributing. The NHCE ADP as of 12/31/2006 is 0%.

Can I use the otherwise excludable rule to say that there are actually no NHCEs "eligible" in 2006 or do I let the HCEs know that they cannot contribute at all for 2007?

For some reason, I cannot keep this straight in my head; I think because I don't work on enough prior year testing plans...

[John Feldt ERPA CPC QPA]

If the NHCE ADP in 2005 was 2.50%, then under prior year method, the ADP for the HCEs have to be limited to:

The lesser of: 2 x NHCE ADP or 2 + NHCE ADP

Then, if greater, the NHCE ADP x 1.25

So, in your example, that is the lesser of: 2 x 2.5% = 5% or 2 + 2.5% = 4.5%

Then, if greater 2.5% x 1.25 = 3.125%

So in 2006, 5% ADP for the HCEs does not pass, 4.5% is their maximum.

As for your question about otherwise excludable, I'll have to look into that further.

[Mike Preston]

Sing along now....

"Times two up to two

Plus two over two

Until we get to two times two times two!

Don't ask, (but) then its five times five times five

And we move that decimal left two"

If you try real hard, the tune to Sunrise, Sunset works.

Yeah, it's Friday.

[pmacduff]

told you I was losing it..

The prior year NHCE was 3.0%, not 2.5%, HCE was 5%, so that part WAS ok. (I really do know the rules, honestly!!!)

My issue is really the OE rule so that the HCEs can contribute in 2007, or are they out of luck because the prior year NHCE is 0%.....

[Tom Poje]

are you saying:

2006 NHCE who are statutory includable = none. zip. zero. non existant

2006 NHCE who are otherwise excludbale = doesn't matter, they exist

in 2007 I compare the HCE with the NHCEs

If I use the otherwise excludable option, then the 'plan' being tested consists of only the HCE, and by regulation, such a plan automatically passes

or at least that is how I understand the rules

[pmacduff]

The 2005 NHCE rate was 3.0% and the HCEs did 5% in 2006. The 2006 NHCE rate is 0%, (the contributing NHCEs termed in 2005).

There may be NHCEs who were hired in 2005 (eligible after 1 month of service), but would still fall in the statutorily excludable group according to Relius. There were also NHCEs hired in 2006 that are participants (after 1 month of service) but they are not contributing and also fall into the OE category.

So I believe Tom you are saying that it is ok to use the OE rule and the highly comps are ok contributing in 2007.

Now...let's say there was a NHCE hired in 2005 who must be considered. If they are not OE and are not contributing, then my HCEs cannot make 401(k) contributions in 2007 because the prior year lower group average was 0%; is that correct?

[Tom Poje]

yes, in that case the HCE is out of luck unless they were also catch-up eligible

well, no wait a second. since we are talking 2007, the plan could be amended to current year testing.

[pmacduff]

actually this is a Multiple Employer Plan (PEO) and the plan uses prior year testing as a whole (for all participating employers) so I don't think that changing the testing method is an option.

The Plan has the safe harbor match provision as another option but many of these Employers don't want to pay anything for their staff. Most of them are small, some have a lot of turnover while some have not so much.

I know that's the purpose of prior year testing (so the HCEs know ahead what they can contibute), but this is the first time I've run into an Employer in this plan having to have the HCEs stop completely (based on the prior year at 0%). Also, the fact that they won't be able to contribute at all again until they have some of the NHCEs start contributing.

I'll have to have the broker on the Plan see if he can encourage some enrollments....

Thanks for all the help!

[rcline46]

Since the plan gives the OPTION of a SH match, why can't the plan also give the option of current/prior testing? Each employer needs to be tested separately anyway, AND in order to have a SH match, the plan is required to use current year testing. So if those with the match are current year, then the option must exist to permit any employer to use current year testing! Recheck the document.

[John Feldt ERPA CPC QPA]

Yes, I think "otherwise excludible" gets determined in the plan year being tested. If they meet the age 21 and 1 requirement in 2006, they are not otherwise excludible for 2006 and should be tested together with the HCEs for 2006. If all NHCEs are considered as "otherwise excludable" in 2006, then you pass.

If they no longer are "otherwise excludable" in 2007, then the client might consider getting their own plan document (so they can amend) or find a way to amend their plan.

Be careful about the statutory exclusion, the IRS has made statements about "21 and 1", saying it should use the plan's entry date definitions, which is not always the maximum a semi-annual definition.