Inclusion in ACP test

[rcline46]

I have two attorneys giving me different answers to this question:

A group of employees is specifically excluded from receiving a matching contribution. The 410(b) test for the 401(m) group passes easily (90% level) so coverage is ok. When we determine who is to be included in the ACP test, are the excluded employees in the test with -0- match, or are they not in the test at all?

My opinion is that they are not in the test since they are not eligible to receive the match. Which attorney can I give a cite to support my contention?

[Kevin C]

I agree they are not in the test.

Cite 1.401(m)-2(a)(1)(i) and note the terms "eligible HCE" and "eligible NHCE". The definitions of both terms are in 1.401(m)-5. If they are excluded from the match portion of the plan, they are not eligible employees. The ACP test compares the eligible HCE's to the eligible NHCE's.

[Guest hussac]

I have two attorneys giving me different answers to this question:

A group of employees is specifically excluded from receiving a matching contribution. The 410(b) test for the 401(m) group passes easily (90% level) so coverage is ok. When we determine who is to be included in the ACP test, are the excluded employees in the test with -0- match, or are they not in the test at all?

My opinion is that they are not in the test since they are not eligible to receive the match. Which attorney can I give a cite to support my contention?

There is a difference between excluded and excludable -- you can exclude individuals from the ACP test only if they are otherwise excludable under the statute -- not when they are merely excluded by the plan's eligibility provisions. When an employee meets the statutory maximum age & service provisions of the 401(k) plan, and is not otherwise excludable (e.g., is not a union employee), the employee must be taken into account for purposes of the coverage, ADP and ACP tests, as well as the 401(a) (4) test, if needed.

[Jim Chad]

I tend to agree with Kevin on this one. For ADP and ACP testing, we only count those the plan document allows to defer.

The definition of an eligible employee, for this purpose, is found in Treas. Reg. §1.401(m)-5.

Of course, this works only if you have passed coverage testing, which should always be done first. At least I think it should always be done first. Can anyone point me toward an exception?

[Tom Poje]

I don't think there is anything 'per se' that says you have to perform one test before the other

the consequences are a different matter.

its possible to self-correct an ADP failure

a failure of coverage is more serious. you would have to go through VCP to fix if its late. and then, you would be stuck using the same method you might have used for nondiscrim testing - or if you switch, then you need to rerun the nondiscrim.

I would say you don't really run one before the other, but rather in tandem, your goal should be to put the client in the best position.

.........

As for not including those not eligible in the ACP test, consider the fact that it is possible to end up with a smaller different body count in the ACP test than in the ADP test.

also, if you have a controlled group, you would not include all bodies in the ACP test unless you were permissively aggregating the plans.

[rcline46]

I agree with Tom. This is not (a)(4) testing, and there are special rules (cited above) for ADP and ACP testing as to whom to include. This is what makes 401(k)s so exciting - they are special (with apologies to the 'church lady').

[MWeddell]

The group that is not eligible for a match does not affect the ACP test arithmetic at all -- but this assumes that the plan does not permit employees to make after-tax contributions.