Change ADP/ACP testing in mid-year

[Guest Sieve]

Calendar year Plan uses current year for ADP & ACP and uses full-year compensation for testing. Want to change from full-year comp to participation comp (compensation while eligible to defer) for the 2008 ADP & ACP tests. Is a change in the definition of testing compensation permissible in mid-year? I don't see any cut-back issues--other than a potential return to an HCE that might not be returned if full-year comp were used in testing. Is there something I'm overlooking?

[Blinky the 3-eyed Fish]

A poorly defined document mandates comp for nondiscrimination testing. But assuming that is indeed the case, I don't see it as a cutback if changed mid-year. There is the argument for a QNEC cutback, but you don't have a set test yet, so I don't think it's a valid argument yet.

[BG5150]

A lot of documents I've seen will define compensation for benefits purposes, but allows the ER to determine an allowable compensation determination (usually 414(s) to be used for the ADP/ACP test.

For example:

Participant A makes $50,000 in 2007, entered the plan 7/1/07 and made $25,000 after that date. The plan limits deferrals to 10% of participation comp.

In this case, the person could only put away up to $2,500 (10% of $25,000). But you could use $50,000 as the comp for ADP test.

The corollary would be true, too: plan could limit deferrals to 10% of full-year comp. In this case Participant A could defer $5,000. But you could use $25,000 as the ADP comp.

As always, check the plan language to see if you have this option.

[Guest Sieve]

I agree--Plan should be flexible enough by referencing 414(s). This one doesn't refer to 414(s) for comp in determining deferral ratios, but actually specifically refers to the adoption agreement selection of whether full-year comp or participation comp should be considered. And, yes, it's a prototype, no less!