ACP Test Failing - "Borrowing Method"?

[Guest christine_FL]

Hi,

If the ACP test is failing, is there a "borrowing method" where you can apply any excess from the ADP test to help pass the ACP test.

I know we have used in past years and I'm trying to understand how it is performed and calculated. I have found the term Multiple Use Test in articles, and this piece of info:

"The annual contribution percentage (ACP) test is similarly performed but also includes employer matching and employee after-tax contributions. ACPs do not use the simple 2% threshold, and include other provisions which can allow the plan to "shift" excess passing rates from the ADP over to the ACP. A failed ACP test is likewise addressed through return of excess, or a QNEC or qualified match (QMAC)."

Also, I see a prior thread about ACP Failing, and not sure I clearly followed if the refund is only ER Match contributions, is this taxable to the HCE?

Thanks!

Chris

[Tom Poje]

"Borrowing" or "Shifting" is possible.

I think I have permission to copy from the Coverage and Nondiscrimiantion Answer Book since I wrote the question for this one anyway, and it is easier than typing it all up. I'm sure tha ERISA Outline Book has something similar in its description. The example used was actually from the old 401(k) regs.

Q 12:78 What is shifting, and how can it be used in 401(k) testing?

Shifting is the common term used to describe the process of moving elective deferrals between the ADP test and the ACP test to improve the test results. The process takes place on paper; that is, if a plan uses the shifting concept to improve test results, no money will actually move from one account to another.

Thus, for example, if a plan has an HCE ADP of 4 percent and an NHCE ADP of 3 percent, the plan passes the ADP test using the alternative limitation rule by 1 percent (3%+2%=5%). The 1 percent passing margin may be shifted over to the ACP test and, if the ACP test was failing by .5 percent, the plan would now be deemed to pass.

Example 12-21

Just Pickles Inc. sponsors a 401(k) plan. The plan document provides that elective contributions made to NHCEs may be used to meet the requirements of Code Section 401(m) to the extent needed under that section. The ADP for HCEs is 10 percent; the ACP is also 10 percent. The ADP and ACP for NHCEs are 10 percent and 6 percent, respectively.

ADP ACP

HCEs 10% 10%

NHCEs 10% 6%

The plan passes the ADP test, but fails the ACP test.

The plan uses elective contributions to move 2 percentage points from the NHCE's ADP to the NHCE's ACP. After the adjustment, the testing results are as follows:

ADP ACP

HCEs 10% 10%

NHCEs 8% 8%

The plan now passes both tests using the basic limitation (8%×1.25 = 10%).

Example 12-22.

The facts are the same as in Example 12-23. The ADP results for both the HCEs and NHCEs could be shifted to the ACP test. The results would be as follows:

ADP ACP

HCEs N/A 20%

NHCEs N/A 16%

The ACP satisfies the basic limitation, because 16 times 1.25 equals 20.

In order to shift, or perhaps more correctly, to use elective contributions in the ACP test, the plan must satisfy the ADP test both before and after the shift has been made.

[Treas. Reg. § 1.401(m)-2(a)(6)(ii)]

What is unclear is whether shifting can be performed if corrections have been made to pass the ADP test in the first place. The IRS has indicated that shifting should be possible after corrections are made to pass a failed ADP test. You would not be able to shift any deferrals that are treated as catch-up contributions since they are not included in the test. (Q and As #15 and #16, 2009 ASPPA Annual Conference) The example provided is as follows:

ADP% ACP%

HCE 7% 2.00%

NHCE 4% 0.75%

1% is refunded to the HCEs, reducing the percentage to 6% (a passing percentage for the ADP test).

After shifting .75% from both HCE and NHCE, the percentages are as follows (and the ACP test is passed):

HCE 5.25% 2.75%

NHCE 3.25% 1.50%

While shifting takes place on ‘paper’, it must actually be possible to complete such a shift.

Example 22a

A 401(k) plan has a last day requirement to receive a match. The match formula is 100% up to the first 3% deferred, with a last day rule requirement.

The testing results are as follows:

ADP% ACP%

HCE 5% 3%

NHCE1 10% n/a (employee terminated)

NHCE2 0% 0%

In this scenario, it would not be possible to shift any of NHCE1’s deferrals to the ACP test since it was not possible for this participant to receive a matching contribution due to the last day provision,

See Reg. §1.401(m)-2(a)(6) (Q and A #18 2009 ASPPA Annual Conference)

............

(usually you have enough other NHCEs that you could shift other amounts.)

...................

multiple use refers to the old days - you could not use the '2' twice - once in the ADP test and once in the ACP test

for example, if you used the '2' limit for the ADP test, you had to use the 1.25 multiplier in the ACP test.

[Guest christine_FL]

Hi Tom,

Thank you for this and the examples.

From Q and A's #15 AND #16, 2009 ASPPA Annual Conference you site below after the ADP test is passed after the corrections/refunds, how is it determined that .75% can be shifted from both HCE and NHCE to get the ACP test to pass on 'paper'?

Thanks!

Chris

[Tom Poje]

actually, you could use any amount in the shift.

they could have shifted .5 and ended up with

HCE 5.5 2.5

NHC 3.5 1.25

which would also pass.

Note in the first example 2% was shifted from the NHCE and 0% from the HCE. the amounts can be different as long as you pass ADP before and after.