Change of Union Status for ADP/ACP testing

[Guest jvi]

I have a plan where employees have transferred from a 'Union' Status to a Salaried, Non Union Status. Are contributions and compensation simply prorated for ADP/ACP testing purposes?

[Tom Poje]

Count only those deferrals made by the employee for that portion of the year he was a non union member. (and I suppose if need be, then count only that portion while he was a union member (if you have an HCE union member and need to test union members as well)

so, I think that you are correct, although I don't know if I would use the term 'prorata', rather comp/deferral as union memebr, and comp/deferral as non union member might be better terminology.

[MWeddell]

I agree with the above posting but will throw in a couple of other thoughts.

1) Consider having the recordkeeper or whoever's doing the test run both with compensation for the whole plan year and also with compensation for just the portion of the plan year for which employees were eligible to contribute to the portion of the plan (union or nonunion) being tested. The results may differ quite a bit because of your unusual circumstances.

2) I'm guessing not too many nonunion employees who decide to unionize were on pace to earn $80,000 or more, so this comment is probably unnecessary. Nonetheless, ask your recordkeeper to look at all compensation (both union and nonunion) when determining HCEs for the next plan year's testing.

[Guest wendycatherine]

I think total deferrals and total compensation should be used. What is the authority to use pro rata data?

Although not directly on point, §1.401(k)-1(g)(1)(ii)(B) provides persuasive authority; for plans that are not permitted to be aggregated under §1.410(B)-7©, if a highly compensated employee with compensation of $80,000 could make elective contributions under two separate cash or deferred arrangements, the actual deferral ratio for the employee under each arrangement would generally be calculated by dividing the total elective contributions by the employee under both arrangements by $80,000.

Using common sense (not always that helpful when talking about the code), I can see it going either way.

[MWeddell]

See Treas. Reg. 1.410(B)-6(d)(2)(i)(penultimate sentence) for the proposition that when an employee switches status from union to nonunion or vice versa during a plan year, one breaks the employee's data into two records, testing one as union, one as nonunion for the appropriate portions of the plan year. This probably is incorporated into the 401(k) and 401(m) regulations through their incorporation of the 410(B) regulation's definition of plan including the mandatory disaggregation of union from nonunion employees.

[Guest ndt123]

I believe you can choose to test them for the entire year based on their current status, per § 1.410(B)-7©(4)(i)©(2) as long as this treatment does not discriminate in favor of HCEs and is applied on a consistent basis.

[MWeddell]

I'm inclined to agree with ndt123's post above, that you may choose to break the data into two separate records or to place the employee's entire year's worth of data based on his/her union or nonunion status on the last day of the plan year. Good catch.