3 year testing cycle

[Guest padmin]

We have a profit sharing client that utlizes a non-uniform allocation method and is thus cross-tested. A large bundled provider is telling the client that the non-discrimination testing only has to be run every three years( at a substantial cost savings to the client). Is anyone out there only testing every three years? Any input appreciated

[rcline46]

If the large bundled provider is willing to indemnify the plan against all possible penalties, then take the deal.

If they won't indemnify the client, the their advice is worthless. Have the client's attorney review the rules which allow three year testing.

[buckaroo]

My understanding of the three year rule revolves around coverage testing only. If a plan feels that there have not been any significant changes to the population and the plan's features, then they can utilize the three year testing rule and only perform the coverage testing every three years. During the years that they are not running the coverage testing, they are relying on the results from the last coverage test run. THis is usually employed by larger companies whose workforce is so large that small increases and reductions in the workforce will not affect the testing.

This rule does NOT apply to non-discrimination testing. 401(a)(4) testing must be satisfied every year. My recolleciton is that there is no exception for this rule. I think the provider may be confused.

[ak2ary]

The three year testing cycle is in rev proc 93-42 and it specifically applies to 410(b) and 401(a)(4), as well as qslobs and 414(s)...see rev proc 93-42 sections 1 and 5

[buckaroo]

Ak2ary,

I stand corrected. Thank you very much for the clarification. My thought process must have been in the transition rule related to coverage and acquisitions/mergers. If I remember that one correctly, that is simply coverage and not non-discrim, correct? Again, thanks for you insight and help.

padmin,

I apologize for the misinformation.

[ak2ary]

I agree that the 410(b) transition rule for corporate transactions does not apply to discrim testing. I should also point out that for plans that only have contributions under 401(k) and (m); you are absolutely right, the 3 year cycle applies only to coverage and not to the adp or acp tests

[Tom Poje]

This is probably an apt description (not mine, but from another source):

Under the Three-Year Testing Cycle Guideline, Employers are not required to perform certain

nondiscrimination tests more than once every three years provided that the Employer’s retirement plan

meets certain requirements. Specifically, if there is no significant change in the make-up of the Employer’s

workforce, no major change to salary structure, no amendment to the plan during a Plan Year, and the

plan’s most recent test results indicate the plan satisfies the nondiscrimination requirements with a

comfortable pass margin, an Employer may rely for two years on the results of a test which demonstrated

compliance with the applicable nondiscrimination requirement

now, in a small plan this is not likely to be the case, a change in one body or two amongst the NHCEs can make a big difference. if its a cross tested plan, then you wouldn't want to change the allocation % because that too would be a significant change. most plans I have seen that rely on the non-discrim test do not have what I would call a "comfortable pass margin", well at least the doctors and lawyers and such I have to run tests for want the max and provide the minimum. so I'm not a big fan of the concept of relying on 3 year testing to save a few bucks.

[ak2ary]

absolutely agreed

In fact the best description I've seen of it is...if you need it, you're not allowed to use it

[mwyatt]

When that rule came out, I do remember the preamble stating that it was due to costs involved to the employer to perform the testing (for that matter, there was also the ability for "snapshot" testing where you just looked at say the end of the year, but used a 77% rather than 70% threshold - obviously a perfect solution for those pesky folks who terminate during the year with over 500 hours and no contribution - voila, just ignore them). Of course, felt that I would be hard pressed to justify the "extra expense" involved in tracking 1 doctor and his 3 nurses during the year to an IRS auditor as a legitimate factor in saying that the plan passed for the year.