Document Calls for Prior Year Testing, but TPA Used Current Year Testing

[Dennis Povloski]

Takeover fun!!

What are the implications if a plan document calls for prior year testing for both the ADP and ACP test, but the prior TPA used current year testing for both for multiple years. The plan was safe harbor more than 5 years ago, so I don't see any reason for them to have been forced to switch.

Thanks!

[Tom Poje]

if a plan is a safe harbor, it automatically 'switched' to current year, though perhaps I use automatic loosely, if your document is worth anything it even says so. Thus avoiding a step of actually amending the plan to current year testing once safe harbor starts. For example:

1.5 Actual Contribution Percentage Test. The term Actual Contribution Percentage Test means the nondiscrimination test of Section 3.15 that is performed each Plan Year on a Non-Safe Harbor 401(m) Plan. The Plan uses the Current Year Testing Method to apply the Actual Contribution Percentage Test. In any Plan Year, if ACP Safe Harbor Matching Contributions (including, if applicable, ADP Safe Harbor Matching Contributions) satisfy the requirements of Section 3.17, then the Actual Contribution Percentage Test will be deemed to be satisfied with respect to such ACP Safe Harbor Matching Contributions for that Plan Year. Notwithstanding the foregoing, a Plan that makes ACP Safe Harbor Matching Contributions that satisfy the requirements of Section 3.17 is deemed to have elected the Current Year Testing Method.

so unless one puts in an amendment to go back to prior year testing, its current year testing.

but you knew all that and were just testing us for fun, weren't you.

[Dennis Povloski]

So I checked my document, and it does say that if you're using the ACP safe harbor and are making contributions subject to the ACP test that the ACP test must be passed using the current year method......

BUT, what if I'm looking at a 2008 restatement that was done after the plan was no longer safe harbor? I do need to actually pin down the date when the plan was no longer safe harbor because I don't know if they were even allowed to mark prior year in this restatement, but just to keep it simple, let's assume that it was safe harbor more than 5 years before the restatement was done.

[Tom Poje]

but once you switch to current year you are stuck on current year unless you amend to prior year, even if you stop the safe harbor, so unless you have a document that says you are on prior year testing you continue to do current year testing.

by the way, the implications (if prior year was to be used, is to rerun all the tests.

my understanding is that even if the safe harbor was in existence for 5 years you couldn't switch back to prior year the first year. reason: the prior year was a safe harbor, and therefore a QNEC or QMAC was used to pass testing. You can't use those numbers a second time because that would be double counting.

[Dennis Povloski]

Yuck! Would that be a demographic failure requiring VCP if using the correct method produced a failure?