ADP/ACP Test

[Guest Jason37]

Question - I have to give a synopsis on this topic to a small group of people this week.

Can you someone explain to me what the difference is between doing an ADP/ACP test by Testing Seperately or doing it via Carve Out? This is one of those topics that I inherently KNOW, I just can't seem to explain in laymans terms.

For example, I recently had a plan fail the ADP/ACP. I tried to Test Seperately and the failure was just as bad. So I tried the test by Carve Out and while it still failed, it only failed "less" miserably. Instead of giving 3 refunds, I only had to give one.

Can someone explain to me what Relius is doing when you test via the Carve Out method?

Thanks.

[Tom Poje]

I suppose one way of explaining it would be as follows:

when testing otherwise excludables, the carve out rule only applies to NHCEs.

in other words, an HCE can never be an otherwise excludable, no matter how few hours or age they are. They are always includable (once they have met the plan's eligibility conditions.

note:this only applies to the ADP/ACP test, not to coverage and not to cross testing.

since there are no HCEs in the otherwise excludable group, there is no need to perform a ADP/ACP test for that group.

[Guest Jason37]

I suppose one way of explaining it would be as follows:

when testing otherwise excludables, the carve out rule only applies to NHCEs.

in other words, an HCE can never be an otherwise excludable, no matter how few hours or age they are. They are always includable (once they have met the plan's eligibility conditions.

note:this only applies to the ADP/ACP test, not to coverage and not to cross testing.

since there are no HCEs in the otherwise excludable group, there is no need to perform a ADP/ACP test for that group.

Hmmmm.....but isn't that same as Testing Seperately? Testing the NCHE's apart from the HCE's?

[J Simmons]

Out of one ADP/ACP testing, you carve out just those NHCE otherwise excludables. No need to separately ADP/ACP test the NHCE otherwise excludables--they're all NHCEs and pass by definition.

[Guest Jason37]

What is the "rule" for who is carved out? Is it applying maximum age and entry dates and carving out anyone who is in the plan but would NOT be in the plan if the maximums were applied?

[J Simmons]

yes, those are the otherwise excludables

[Guest Jason37]

yes, those are the otherwise excludables

What is the best way to describe the difference between running an ADP/ACP Test via Testing Seperately and doing an ADP/ACP Test via a Carve Out Method?

It seems like no matter how I try to explain it, it sounds like doing a Test Seperately method....so why even bother with a carve out? I guess my question is this.....What makes a Carve Out different from other testing methods??

[fiona1]

Watch your terminology. I wouldn't use the term "tested separately" when trying to explain your situation.

First you test on a "Total group" basis. Meaning, you're testing EVERYONE ELIGIBLE FOR THE PLAN.

Next, you "carve out" the otherwise excludable employees. This is also referred to as permissive disaggregation.

"Testing Separately" normally refers to situations where you have more than one plan (either with one employer or within a controlled group). Here you can test each plan separately, or you might be able to permissively aggregate them to pass coverage.

The best way to explain your situation is by comparing the "Total group" test versus the "Permissive Disaggregation" test.

The Total group test my include 500 non-highly compensated employees while the PD test may include 490 non-highly compensated employees. You're able to "carve out" the NHCE's who don't meet the statutory entry requirements of age 21, one year of service. These are the employees who are more likely not to defer - thus creating more favorable test results.

[Guest Jason37]

Thank you.

When I saying "Test Seperate" I was using the term from Relius. I have three options in Relius when I go to run the ADP/ACP:

Include In Test

Test Seperately

Carve Out NCHE's

There was disagreement about what the difference was between Test Seperately and Carve Out NHCE's. There is a consensus that it is the same thing here in my office but I know that is not true.

[wvbeachgirl]

Include In Test = all participants, whether or not they have met statutory maximum eligibility

Test Seperately = all participants (both HCE and NHCE) who have met statutory maximum eligibility are in the "Non-Excludable" test; those participants (both HCE and NHCE) who have not met statutory maximum eligiblity are in the "Otherwise Excludable" test

Carve Out NCHE'sTest = ALL HCEs (regardless of whether or not they have met statutory maximum eligiblity) and ONLY those NHCEs who HAVE met the statutory maximum eligibility are in the test

The main difference between "test separately" and "carve out" is that if there are any HCEs who have not met statutory maximum eligibility are moved to the "otherwise excludable" test; in the carve-out test ALL HCEs are included, but not all NHCEs (if there are any who haven't met the statutory maximum).

Does that help?

J

[Guest Jason37]

Include In Test = all participants, whether or not they have met statutory maximum eligibility

Test Seperately = all participants (both HCE and NHCE) who have met statutory maximum eligibility are in the "Non-Excludable" test; those participants (both HCE and NHCE) who have not met statutory maximum eligiblity are in the "Otherwise Excludable" test

Carve Out NCHE'sTest = ALL HCEs (regardless of whether or not they have met statutory maximum eligiblity) and ONLY those NHCEs who HAVE met the statutory maximum eligibility are in the test

The main difference between "test separately" and "carve out" is that if there are any HCEs who have not met statutory maximum eligibility are moved to the "otherwise excludable" test; in the carve-out test ALL HCEs are included, but not all NHCEs (if there are any who haven't met the statutory maximum).

Does that help?

J

This helps HUGE! Thank you so much!

[Below Ground]

I suppose one way of explaining it would be as follows:

when testing otherwise excludables, the carve out rule only applies to NHCEs.

in other words, an HCE can never be an otherwise excludable, no matter how few hours or age they are. They are always includable (once they have met the plan's eligibility conditions.

note:this only applies to the ADP/ACP test, not to coverage and not to cross testing.

since there are no HCEs in the otherwise excludable group, there is no need to perform a ADP/ACP test for that group.

Tom, you are talking about the "Early Participation Rule", right? An HCE can be an OEE for ADP when using the "Disaggregated Plan Testing Option". (These are both discussed on page 4/25 of the ASPPA's 401(k) Plans and Intermediate Administration Topics.)

"Carve Out Rule" is some verbiage that applies to Relius when talking about the Early Participation Rule?

Did not know that you could NOT use for Coverage and Cross Testing. Luckily, I always passed with the Disaggregated Plan Testing Option. (Didn't need the extra kick from the EPR.)

Thanks.

[Tom Poje]

below ground:

I believe we are speaking on the same terms. I think you make a good point (whether you intended to or not)

there is verbage used from time to time that may describe something that is not used by others.

so lets say I have a plan with immediate eligibility. 1/1/08 - 12/31/08.

2 ees hired 5/1/08, so they enter the plan immediately. one ees is the owners kid, so is an HCE because of attribution. the other is an NHCE.

1. testing can be run including all people in the test.

2. testing can be run treating the NHCE and HCE kid as otherwise excludable (thus 2 ADP test are performed - in addition, 2 coverage tests are performed)

3. only the NHCE is 'carved out' and treated as otherwise excludable. in this case there is only 1 ADP test, because the otherwise excludable group consists of NHCEs only. this is a special rule found only under the 401k regs, so it does not apply to cross testing, nor is this rule found under the coverage rules.

[Below Ground]

We are in full agreement. (It is almost never that we are not in agreement!) Semantics were "throwing me". I thank you again for the education found in the last sentence of #3. I did not know that this was limited to ADP/ACP only.