CURRENT VS. PRIOR DATA IN PERFORMING ADP/ACP

[Guest CHRISTIE BOSS]

PLEASE CORRECT ME IF I'M WRONG! HERE'S MY UNDERSTANDING OF NEW DISCRIM. TEST RULES...

IF USED CURRENT DATA FOR ALL PREVIOUS YEARS INCLUDING 1997, CAN ELECT TO USE CURRENT OR PRIOR IN 1998. IF USED PRIOR IN 1997, THEN CAN ELECT TO USE PRIOR OR CURRENT IN 1998, BECAUSE YOU CAN ALWAYS ELECT TO USE CURRENT YR DATA. IF USE PRIOR IN 1997, CURRENT IN 1998, THEN MUST USE CURRENT IN 1999. YOU CAN NOT ELECT TO USE PRIOR FOR 5 YEARS. RIGHT?...OR AM I TOTALLY CONFUSED?? PLEASE ADVISE!!

[Guest PWBAer]

Originally, 1998 Plan year was year that Plan administrator had to decide to use either the current or prior year's non-discrim. test results. However, IRS has issued a ruling which allows Plans to choose (essentially, the better of) to use either the current year's test results or use against last year's test results for 1998 AND 1999. In other words, two extra years of comparison data. Once the comparison shopping goes away, it will take an act of IRS to allow a Plan to change from its use of either the prior year or current year data.

[LCARUSI]

PWBAer -

Can you provide a cite on the IRS ruling?

Thanks

[Guest Big John]

I'm not sure I agree with PWBAer with respect to changing testing methods after 1999. You could be right, but I thought the change in testing methods could be made by written election of the employer prior to the end of the plan year which is being tested. Since the IRS is requiring the election to be stated in the written terms of the plan document, it will likely be a matter of amending your plan (prior to year end) each time you wish to change testing methods. I am told that there won't be an approval process by the IRS for changes in testing methods.

[LCARUSI]

Big John -

You should take a look at IRS Notice 98-1, section VII. It discusses rules for switching from current year to prior year method. It is definitely NOT as simple as amending the Plan from year to year.

If you did this, you would be in violation of section VII and also section VIII. Section VIII (of 98-1) is the anti-abuse provision.