ACP - Prior Year Method

[fiona1]

1/1 plan year for a 401(k) plan. In 2006 the plan had deferrals and a qualified match (i.e. QMAC or Match in K). Both contributions were tested in the ADP test. It failed and refunds were issued. An ACP test was not done.

The plan was amended and effective 1/1/07 they switched from a qualified match to a basic match (Match in M) - which has to be tested in the ACP test.

Now that an ACP test has to be done for 2007, does anyone know what prior year percent would be used? Here are the 3 options I can think of:

1. Since an ACP test was not done in 2006, you'd have to use 0%.

2. Since the plan was amended, could you make the argument that they added the 401(m) provision for the first time and therefore could use the 3% for new plans?

3. I suppose you could retest 2006 to test the qualified match in the ACP. However, the ADP results will change and since you're past the 12 month deadline then that could get messy.

Thoughts?

[Tom Poje]

I'd vote no on #2 - you are not adding a 401(m) feature, you already had one before.

I am a bit conused on the remainder of the discussion. it sounds like you are doing prior year testing. in that case last years QMAC to the NHCEs could still be used in the ACP test, because when you ran last years test you should have compared 'last years HCE' it to the 'prior years' ACP numbers for the NHCEs.

[fiona1]

The qualified match has always been tested in the ADP test. So in 2006, there was no ACP test done at all.

But we have to run an ACP test in 2007 because in 2007 they have match money that can ONLY be tested in the ACP.

When we run the ACP test for '07 we need a prior year percent. Since the qualified match was tested in the ADP last year, I didn't think we could use that average for the ACP test in '07.

Here is an example:

2006 ADP test:

NHC Elective deferral average = 5.00%

NHC Qualified match average = 7.00%

NHC ADP average = 6.00%

2006 ACP test:

Not done

2007 ADP test: prior year average used must be 6.00%

2007 ACP test: prior year average used must be 0.00%

I didn't think we could apply the 7.00% qualified match average (tested in the ADP test in 2006) as the prior year percent on the 2007 test.

[Lou S.]

I'm assuming you've always used prior year testing. If that is the case why don't you use option 3. Re run the ADP/ACP test for 2006 with deferral in ADP and qualified match in 2006 in ACP and use those only as your prior percentages for 2007.

I'm not sure there is regulatory athourity for this though.

[BG5150]

Are you doing current for ADP and prior for ACP?

I'm fuzzy on how a prior year test would work with a QMAC. For a 2006 test, would you take the ADR's from 2005 and add to it the 2006 QMAC?