HCEs, prior year data, eligible compensation questions for ADP test

[Guest EBC]

The plan I am looking is a calendar year plan. Here are my questions:

1) If I use prior year data for NHCEs, do I include in my HCEs a HCE who terminated in the prior year and count him w/ an ADP of 0?

2) Again, if I use prior year data for NHCEs, do I not include in the NHCE pool anyone who gained eligibility in the current year?

3) When I calculate the ADP for NHCEs using prior year data, and new hires have eligible comp less than their gross comp in the prior year, do I use total year comp?

[LCARUSI]

1) No. If the HCE terminated in the prior year, he or she has no eligible compensation in the testing year. Therefore, they are not included in the test.

2)No. They are not included in the determination of the prior year ADP/ACP for the NHCE group. Their contribution rates would be included in the determination of the prior year's ADP/ACP for NEXT YEAR'S testing.

3) I don't understand the question. Please clarify

[Guest EBC]

Regarding question 3)

If a participant gains eligibility at 7/1/97, when I look at prior year compensation (1997), and I am testing the 1998 calendar year, do I use the full 1997 year comp or only eligible comp (7/1/97 to 12/31/97)? The specific situation is a possible HCE who earned over $80,000 in 1997 but gained eligibility at 7/1/97. His eligible comp is under $80,000. My guess is we use the total year comp in HCE determination.

[Guest EBC]

in regards to question 3)

if an NHCE gains eligibility during the middle of the prior year and has eligible comp that is less then the total comp for the year, is his prior year ADP based on partial year comp? or total year comp?

i.e. DOH 6/30/96, DOP 7/1/97 1997 total comp 50,000 eligible comp 25,000 401(k) 7/1/97 to 12/31/97 500.

[LCARUSI]

Answering your two questions in the order posted:

1)You are looking at the employee's prior year's compensation to determine if he or she is an HCE. You use the full prior year's comp even if the employee was not eligible to participate in the entire prior year.

2) Use partial year comp. In your example, if the employee contributed at 10% from July 1 to Dec 31, the Deferral is (.10 x 25000)/25000 = 10%

[Tom Poje]

Make sure your document allows you to use comp from DOP. some do not,(why, why, o why are there documents written that stupid) and you get stuck with a lower deferral %!