Prior Year Testing and Compensaiton Def. Change

[buckaroo]

Client has a 401(k) plan and uses prior year method for 2006 and 2007. Definition of Compensaiton in 2006 excludes bonuses. For 2007 year, client amends definition of testing compensation to 415 comp Does the 2006 test need to be re-run with the amended definition of compensation when calculating the ADP for the NHC group (which will be used in 2007 test.) My opinion is it does not, but wanted to see what others thought.

[pmacduff]

FWIW, I agree with you - the prior year % is whatever it was and unrelated to the comp definition change for the current year...

[ak2ary]

So you would use a different definition of pay to determine NHCE adp rates than HCE adp rates, and in this situation the definition of pay for nhces uses a pay with exclusions that artificially raises the NHCE ADP compared to the HCE ADP which is based on total pay...

Good luck with that...

I dont have time right now to do the leg work but I think you will find in notice 98-1, or similar guidance that while the determination who is an HCE and an NHCE for prior year testing doesnt change, you need to use this years plan provisions to determine the nhce adp for last year

[pmacduff]

I don't agree. The prior year testing % for the NHCEs is determined on 12/31 of that year (12/31/2006 in this case) and is already in place when the next plan year begins.

That's one of the whole points of prior year testing - so that the HCEs know what they are limited to as the plan year begins.

[ak2ary]

VIII. ANTI-ABUSE PROVISION

This guidance is designed to provide simple, practical rules that accommodate legitimate plan changes. At the same time, the rules are intended to be applied by employers in a manner that does not make use of changes in plan testing procedures or other plan provisions to inflate inappropriately the prior year ADP and ACP for NHCEs (which are used as benchmarks for testing the ADP and ACP for HCEs).

FROM 98-1

[pmacduff]

It didn't sound to me (from the original post) as though the Employer changed the compensation definition because of the 401(k) non discrim testing or any other testing issue, but rather as an overall permanent plan change.

So... my opinion is still that the client is ok with that change and should use the original prior year testing number.

I do definately agree that they shouldn't be changing the comp definition continuously but just don't think that applies in this case....but I have been wrong before !

[ak2ary]

For 2007 year, client amends definition of testing compensation to 415 comp

Why else would you amend testing comp...if they amended comp definition in general I would be ok but if you amend testing comp using prior year testing...there is only one reason

[pmacduff]

sorry ak2ary...reading too fast and I missed that "testing" word which of course makes all the difference.

But I'm still not 100% sure I agree that it is an "abuse" issue to use the original prior year testing % if the plan is amended and remains that way permanently as far as the testing comp definition.

[Bill Presson]

sorry ak2ary...reading too fast and I missed that "testing" word which of course makes all the difference.

But I'm still not 100% sure I agree that it is an "abuse" issue to use the original prior year testing % if the plan is amended and remains that way permanently as far as the testing comp definition.

I wonder how many NHCE's actually got bonuses and if it would really make difference.

[ak2ary]

I think its a facts and circumstances determination at best, but to be on the safe side, since depending on the old definition's impact on testing pay it could be a very very big difference, my amendment would change not only this year's testing methodology, but also last year's methodology with respect to the NHCE ADP for purposes of this year's test