Back to Shifting

[buckaroo]

Plan fails both the ADP and the ACP. Client processes refunds for the ADP failure. After the refunds are processed, the test is deemed to pass. (However, due to the leveling method, if the test is rerun, it would show a failing result.) Now in order to correct the ACP failure, deferrals will be shifted from the ADP to the ACP. Now, we know that the ADP is passing by virtue of the deemed passage because of the refunds. After we shift, we are required to pass the ADP. Do we actually run the ADP test again? If so, there is a great chance that the plan will fail (again because the leveling doesn’t “actually” correct the issues. Am I correct? Or do we simply take the ADP post corrections and utilize that in the aggregate and not recalc the actual tests. (I hope that this makes sense.) Any comments would be greatly appreciated.

[ERISAnut]

Plan fails both the ADP and the ACP. Client processes refunds for the ADP failure. After the refunds are processed, the test is deemed to pass. (However, due to the leveling method, if the test is rerun, it would show a failing result.) Now in order to correct the ACP failure, deferrals will be shifted from the ADP to the ACP. Now, we know that the ADP is passing by virtue of the deemed passage because of the refunds. After we shift, we are required to pass the ADP. Do we actually run the ADP test again? If so, there is a great chance that the plan will fail (again because the leveling doesn’t “actually” correct the issues. Am I correct? Or do we simply take the ADP post corrections and utilize that in the aggregate and not recalc the actual tests. (I hope that this makes sense.) Any comments would be greatly appreciated.

You may find this hard to believe, but 'shifting' is actually different from 'borrowing'. Shifting, as defined in the Code, would create this. Borrowing, as defined in the Regs, would allow you to work only with the resulting percentages after correction for ADP.

Your software should handle this for you.

Hope this points you in the right direction.

[Kevin C]

You are failing ADP, so you can't shift deferrals to the ACP test.

1.401(m)-2(a)(6)(ii) Elective contributions taken into account under the ACP test. --Elective contributions may be taken into account for the ACP test only if the cash or deferred arrangement under which the elective contributions are made is required to satisfy the ADP test in §1.401(k)-2(a)(1) and, then only to the extent that the cash or deferred arrangement would satisfy that test, including such elective contributions in the ADP for the plan year or applicable year. Thus, for example, elective deferrals made pursuant to a salary reduction agreement under an annuity described in section 403(b) are not permitted to be taken into account in an ACP test. Similarly, elective contributions under a cash or deferred arrangement that is using the section 401(k) safe harbor described in §1.401(k)-3 cannot be taken into account in an ACP test.

[ERISAnut]

Kevin C,

What this is saying is that in order to shift, you must first correct the ADP test upon failure. Once done, you can shift any and all of those into the ACP test. Once shifted, the ADP test must continue to pass after the shift. Hopefully the shift will help the ACP test.

But, Borrowing is different. Borrowing doesn't deal with the amounts, per se, but instead with percentages. So, once you distribute excess employee contribution to correct ADP, the resulting percentages in the test is deemed to pass.

For instance:

ADP Test: HCE Avg: 8% NHCE Avg: 5%

After correction. HCE Avg: 7% NHCE Avg: 5%

ACP test: HCE Avg: 1.5% NHCE Avg: .5%

After Borrowing: HCE Avg: 4.5 NHCE Avg: 3.5% I get here by taking 3 from the HCE and 3 from the NHCE.

The resulting ACP test after borrowing: HCE avg: 4.5 NHCE Avg: 3.5

The resulting ADP test after borrowing: HCE Avg: 4 NHCE Avg: 2

The both continue to pass. But you do not begin this step until you first corrected the ADP failure.

[buckaroo]

ERISAnut,

Thanks for your reply. I have very little experience with this. I am surprised to hear this and a little confused. I am correct in saying that I am borrowing from the ADP to help satisfy the ACP. Since I am borrowing, I simply use the resulting percentages, not recalc anything related to the individual percentages?

Also, again with very little experience, is it simply a difference in terminology? I would think the answer is no, but I am unclear on what the difference would be. Can you clarify a bit or point me in the direction where I can research this a bit more.

Sorry for possibly being unclear about this. Appreciate your help.

[ERISAnut]

Yes,

You are hearing correctly. Here's the major difference.

The IRC provides that when you "shift", then the 'dollars shifted' must be removed from the ADP test and tested under ACP. When this is done, then anyone who is ELIGIBLE to defer into the plan must now be included in a ACP test, regardless of the fact they they may not have been eligible for a matching contribution (i.e. last day & 1000 hour rule).

Borrowing, as outlined in the Regs (which is the way the IRS interprets the Code), does not require this. Regardless of the last day & 1000 hour rule being applied to the matching contribution, you are allowed to 'borrow percentages' from the ADP test without requiring those employees to be tested under ACP. You are not shifting dollars, but instead borrowing percentages. Once borrowed, no dollar amounts are earmarked to any individuals. This is a cleaner, easier, more liberal way of doing the calculation. Also, it is perfectly acceptable to the IRS as they made it that way.

[Kevin C]

Can you point me to the reg section that addresses borrowing from the ADP as opposed to shifting? I remember things better if I can see them in writing.

[BG5150]

But if you are doing the dollar-leveling method, the test may not pass using what's left for the HCE's. So can you do the beg, borrow and steal still? Do you assume that after the refunds the test passes "on the number"?

[rcline46]

It is my understanding that you CANNOT do shifting or borrowing if the ADP test fails. COrrecting the ADP test does not make it pass, it is still a failing test. You might want to review the ASPPA/IRS Q & As about 4-5 years ago on this.

[Tom Poje]

Kevin C:

I agree with you. I see nothing referring to 'borrowing' in the regs. of course the term 'shifting' isn't used either, it is simply the term coined to referring to elective contributions used in the ACP test.

The definition of eligible employee under 1.401(m)-5 indicates these are employees who are directly or indirectly eligible to receive a matching contribution or make employee contributions (after tax contributions). I see nothing in this definition that says "or have elective contributions used in the ACP test".

the ACP for a group of eligible employees... 1.401(m)-2(a)(2)

the determination of the ACP percentage is "eligible employee...sum of employee contributions and matching contributions...and QNECS and elective contributions..." 1.401(m)-2(a)(3)

Thus, my reading of things would say you can't simply 'shift' numbers without considering other facts and circumstances. e.g. I don't see how you can shift deferrals for someone who is not eligble for the ACP in the first place.

on the other hand, since it appears you can shift any amounts of elective deferrals it probably doesn't matter in most cases.

as for whether you can shift after making corrections, it is unclear. my personal leanings are toward saying yes, since at that point in time you have a test that is passing, and since you don't rerun your test after making corrections, I don't see why shifting would make a difference (but I can understand if the IRS made it clear you couldn't)

[imchipbrown]

Can I beat a dead horse? ADP test and ACP test failing. If I first shift a bit of NHCE deferral over to ACP, I can pass this and the HCEs avoid forfeitures of the match. Then do the ADP and refunds.

[Tom Poje]

no. regs are clear you need to pass both before and after shifting (the term the regs use is 'elective contributions taken into account under the ACP test) see

1.401(m)-2(a)(6)(ii)

however, if you are failing the ACP test you could distribute the excess aggregate contributions first, then distribute the excess contribute from the ADP test and avoid forfeitures.

there is no requirement you perform the ADP test first and forfeit related match