Proper ADP compensation for testing

[Guest 410b]

Plan has monthly entry dates.

Per all our discussions last year, the ADP test will be done using only 1 semi-annual entry date.

Plan allows ADP test to exclude compensation before employee/participant is eligible for the plan.

So when I get the compensation for the tester, do I get the compensation after the employee actually entered the plan according to the plan provisions, or do I get the compensation as though the employee did not enter the plan until the semi-annual date used for testing purposes?

I still do not fully understand what is allowed when I am "tweaking" the rules for maximum test benefit.

[Tom Poje]

based on your comments of having semi- annual entry dates, (assuming its a calendar year plan)

most administrators would request on people who enter the plan 7/1

both comp for the whole year and from 7/1

testing comp can be from 7/1, if plan is top heavy you need to use full year comp.

to determine max deduction you use full comp as well

if an ee enters mid year and you only asked for comp from 7/1 but the person made over 105,000 you would never know if that person would be an HCE next year

[Guest 410b]

Hi Tom,

My plan is fiscal year, but to continue with your example and clarify my question:

In my plan people would actually enter the plan 1/1, 2/1, 3/1, 4/1, 5/1, 6/1, and 7/1. Not understanding all the nuances of testing, in the past I have given ADP compensation from 1/1, 2/1, 3/1, 4/1, 5/1, 6/1, and 7/1 based on the participant's entry date according to the terms of the plan.

In my long thread last year I learned that a commonly accepted testing method is to test based only on a semi-annual entry date even though the actual entry dates are monthly. So all of those people - for purposes of the test only - are going to be considered as having entered the plan on 7/1. That being the case, should I only compute their ADP test compensation from 7/1 as well? (This question did not occur to me during the discussions last year.)

(I understand that I also have to provide the whole year compensation to the tester - there is a separate column in their spreadsheet for that. My concern is to get the proper ADP compensation for testing that matches with the principle of changing actual plan entry dates to an (acceptable) artificial date for benefit of the HCEs during the testing process.)

[rcline46]

Based on your explanations, you do not have it correct.

First, for statutory exclusions, if a person has not reached a statutory entry date they are not in any test (if all the statutory exclusions are non-HCEs).

For those who are includable, you will use their compensation and deferrals from their actual entry dates and NOT the statutory entry dates.

Example: If someones actual entry date is 4/1 and their statutory entry date would be 8/1 (you said it was a fiscal year), then you would use everything from 4/1. You cannot test a person partially excluded and partially included.

[Guest 410b]

If I continue with the calendar year example above, (and yes all non-HCE)

Is July 1 the statutory entry date? If so, wouldn't all the people I mentioned above with actual entry dates of 1/1, 2/1, 3/1, 4/1, 5/1, 6/1 and 7/1 enter the plan on the statutory entry date?

If I am still understanding the information from my last year's thread, the statutory entry date approach is desirable because it removes all participants who entered the plan 8/1, 9/1, 10/1, 11/1 and 12/1 from the testing database - making a smaller dollar amount in the non-HCE test base.

Extending the logic of minimizing the non-HCE dollar amount, it seemed to me that for a person that actually entered the plan on 3/1, but were not going to be allowed to enter it for testing purposes until 7/1, that it would be appropriate to compute their ADP compensation only from 7/1 rather than 3/1.

------------------edit

I was trying to work out a specific example and I see 1 problem, probably the problem, with what I was suggesting.

The testing people will have the deferrals from 3/1 so if I just give them compensation from 7/1 it will mess things up badly.

[rcline46]

Yes, you are getting it now. If they are not excludable, then you must use information from date of entry.