ADP/ACP Aggregation

[fiona1]

Hoping I can get some thoughts on the following situation...

Two 401(k) plans (we'll call them Plan A and B) are aggregated for both coverage and ADP/ACP for 1/1/06 to 12/31/06. However in 2007, they are being tested separatley. Both plans use the prior year testing method.

Let's assume the NHCE average on the 2006 aggregated test was 4.50%. What prior year percent would you use on the separate tests for Plan A and Plan B in 2007?

The regs define this as a plan coverage change and says to determine the prior year subgroups and defines that as:

(B) Prior year subgroup. --The term prior year subgroup means all NHCEs for the prior plan year who, in the prior year, were eligible employees under a specific plan maintained by the employer that included a qualified cash or deferred arrangement and who would have been eligible employees in the prior year under the plan being tested if the plan coverage change had first been effective as of the first day of the prior plan year instead of first being effective during the plan year. The determination of whether an NHCE is a member of a prior year subgroup is made without regard to whether the NHCE terminated employment during the prior year.

© Weighted average of the ADPs for the prior year subgroups. --The term weighted average of the ADPs for the prior year subgroups means the sum, for all prior year subgroups, of the adjusted ADPs for the plan year. The term adjusted ADP with respect to a prior year subgroup means the ADP for the prior plan year of the specific plan under which the members of the prior year subgroup were eligible employees on the first day of the prior plan year, multiplied by a fraction, the numerator of which is the number of NHCEs in the prior year subgroup and denominator of which is the total number of NHCEs in all prior year subgroups.

I can see this going one of two ways:

1. The plans were aggregated in 2006. If plans are aggregated together, they are treated as a single plan for nondiscrimination testing. Therefore there is only 1 prior year subgroup. The NHCE average used on both Plan A and Plan B's tests for 2007 would be 4.50%. If 2 plans are tested separately in Year 1 but aggregated in Year 2, then in that case you have 2 prior year subgroups.

2. If the plan coverage change had been first effective on the first day of the prior plan year (2006), the testing would have been disaggregated and you would have had two subgroups. Therefore you determine individual NHCE averages for each plan in 2006 to use on the 2007 test.

Any thoughts?

[dcoderre]

There is only 1 prior year subgroup. Your "weighting" is 1/1, so you would use 4.5% in tests A & B in 2007. See example 4 in reg 1.401k)-2©(4)(iii).