ADP/ACP test question

[Guest Theresa]

I have a plan that for the plan year ending 12/31/99 there are no highly compensated employees, however next year there will probably be one. How do you go about determining how much that individual can put in the for the PYE 2000, so that there test will still pass. I know there is someway to calculate it, but I'm just not real familiar with how to go about doing it. Any help would be appreciated.

[Guest Bob Miller]

You should be able to look at current year NYCE average and determine what he will be able to contribute for 2000. That is if you will be using prior year NHCE #s for 2000 testing. Will this ee make over 80,000 in 1999 that will make him HC for 2000?

For example: If you have 5 employee's

1999

ee 1 80,000 10%

ee 2 25,000 05%

ee 3 35,000 08%

ee 4 45,000 08%

ee 5 55,000 08%

__________________________

240,000 39%

Avg 7.8%

2000

ee 1 85,000 9.8% = 8300.00

ee 2 25,000 05%

ee 3 35,000 08%

ee 4 45,000 08%

ee 5 55,000 08%

Avg 7.25% curr yr nhce avg

If you use prior year #'s you should be able to calc fairly close. If you have questions,drop me a line.

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Bob Miller

[Guest Theresa]

I appreciate your help Bob, I will give that a try. And in response to your question of will this person be making over $80,000 next year, the answer is yes.

I'll let you know if I have any other questions.

Again thank you.

[Guest Theresa]

Let me ask this question, is it a safe assumption to say he would more than likely be able to contribute the maximum in 2000 of $10,500, seeing how he is the only highly compensated employee and will be for some years to come and there are about 58 other employees all of whom participant with the exception of about three or four.

[Guest Bob Miller]

I wouldn't say that it was a given. If he defers the max of 10,500 on 80,000 he would put in about 13.13% of his comp. The NHCE would then in turn need to contribute on an average, 11.13. Unless the NHCE's on really deferring a lot, it will be hard for him to max out. It would actually help if there were a few more HCE's deferring at lower rates so the HCE average would be brought down.

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Bob Miller

[IRC401]

FYI- For 2000, according to the statute, someone is an HCE if he earned over $85,000 in 1999. The IRS has issued NOTHING that you are able to rely upon that supports the position that $80,000 is correct. If the individual earned over $85,000, this company doesn't have an issue. If he earned between $80,000 and $85,000 and was not able to contribute as much as he wanted because of the ADP test results, the individual would have the basis for a lawsuit. I recommend advising your clients about the confusion that the IRS has unnecessarily created over this issue.

[Guest ndt123]

The IRS letter, which is widely available, clarified their position. They have also said so much at several conferences.

That's good enough for me.

If there's a lawsuit, let us all know. It would rank right up there with the woman who sued McDonald's over the spilt coffee.

[Alf]

I'll have a hard time advising clients to disregard the IRS's letter and its reliance on Temp Reg 1.414(q)-1T, Q&A-3©(2). I think that the point will be moot pretty soon, though, if the IRS ever releases new regulations on the changes to the HCE rules.

[Guest JimD]

If the average ADP is above 8 for the NHCE don't forget about the 125% rule which will give a better result than the 2+ rule..