USING PRIOR YEAR ADP TESTING METHOD WHEN THIS IS ACTUALLY 2ND YEAR OF

[Guest pdall]

I have a 401(k) plan that was signed on 12/23/97. For 97, only PS contribution was made. For 1998, ADP is failing and could use the 3% fpy prior method. Section V of notice 98-1 indicates the fpy is the "first py in which the plan, within the meaning of 414(l), is or includes a 401(k) plan (i.e., the first year a plan provides for elective contributions.....). DOES THIS MEAN I TREAT THIS AS THE FIRST PLAN YEAR, AND USE 3%? THANK YOU.

[Dan]

You said that the plan was effective 12/23/97. Was it a 401(k) Plan at that date or did it amend to be a 401(k) effective 1/1/98?

[Guest pdall]

The plan was originally 401(k) / PS effective 1/1/97, signed 12/23/97, deferrals started early 1998. (Yes, was 401(k) to begin with).

Thanks.

[Dan]

I can not give you a definative answer. Perhaps an attorney could give one. I am not aware of any ruling that deals with a case like this. A conservative interpretation would be that 1997 was the first plan year for the 401(k). Therefore the prior year would be 0%. However, with that said I would agree with you that 1998 is the first plan year for the 401(k) Plan. Since deferral deposits could not be made prior to signature date of plan, and assuming initial deferral elections could not be effective until 1/1/98 you have a very good case as to why 1998 is a first PYE, therefore you could use the 3% minimum for that test. Hope that helps.