IRS Notice 98-1 and 3% NHCE Percentage for PY

[Guest Edward McElroy]

Under IRS Notice 98-1, an employer who maintains a 401(k) plan that utilizes the prior plan year trsting method may treat NHCEs as deferring 3% during the first plan year. If NHCEs actually deferred 2.5% during the first plan year, what is the NHCE ADP for the second plan year ... 3% (based on prior plan year attribution) or 2.5% (based on actual contributions)? Any thoughts? Thanks. Ed

[LCARUSI]

2.5%

If X is the first plan year, you are allowed to use 3% for the prior year X-1 because you don't have actual data for year X-1.

When you test for year X+1, you have data for the prior year X and you should use it.

Another way to look at it is this: if you use 3% in the second year of testing, presumably you could use the same logic to use 3% every year forever - not what the IRS intended.

[Guest LWYRRCM]

Under Notice 98-1, in the first plan year, employer is allowed to use deemed nhce adp of 3% . Under 414(q) look-back testing for HCE status, HCEs are employees earning more than $80,000 in prior year, or 5% or more owners in prior or current year.

If there are no 5% owners because it is a brand new, publicly traded corporation, does that mean there are no HCEs in first plan year because there is no prior year?

Hince no need for adp/acp testing in current year?

If company in previous example is spin-off from another publicly traded corporation, but not in the same controlled group as its predessessor after spin-off, is answer different?