Early Entry Deferrals/1 yr wait for match

[Guest Effie Clark]

I have a client who established a 401k in 1998 and let anyone hired on 5/1/98 defer ASAP but had to wait to share in match after 1 year eligiblity and dual entry date. I now have 3 people with a 7/1/99 entry date for match but have been deferring since 1/1/99.

My question is, for ADP/ACP purposes, do I use full year's compensation for both tests or full year for ADP and half year for ACP?

My software won't do this so before I go to the trouble of creating a spreadsheet in Excel, I would like to know if anyone has ever had this come up and what did they do.

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EAC

[Guest]

Fascinating! Hadn't thought about that possibility.I would be curious to hear other responses. It is probably something the regs didn't expect (similar to much of the problems with top heavy and 401(k)s )

let's see...

document says use 414(s) comp

414(s) comp defined as 'shall only be recognized for that portion of the Plan Year during which an Employee was a Participant in the Plan'

in regards to the match, this ee was not a participant until 7/1 (for example)

Therefore it would seem you should (required?) to use comp from 7/1 in the test.

Hmmm. How do I define 'Plan'?

How is match defined? Does it catch up over the whole year? If it does, then I would argue using comp for the whole year.

If I need to 'shift' ADP to pass ACP then what????? That really looks like a mess.

(If plan passes either way, who cares, but I think you have raised a good one. maybe someone has a letter ruling from somewhere)

[IRC401]

If the plan document specifes a definition of comp for testing, use the plan definition. I am not aware of any reason why the plan couldn't specify different definitions as long as both definitions are nondiscriminatory.

[MWeddell]

An employer may limit the period used to determine 401(k) & 401(m) testing compensation to just the portion of the plan year in which the employee was eligible. Treas. Reg. 1.401(k)-1(g)(2)(i), 1.401(m)-1(f)(2).

Check to see whether your plan document gives you this flexibility. If the plan document gives you your choice, then using full year's compensation for both the (k) and the (m) tests will be easier often but using just the partial year compensation for the (m) test tends to improve the test results.

[TPApril]

On this same line of thought on a plan with immediate entry for 401k and then 1 year wait / mid-year entry for match, say the plan used compensation from date of participation, would the 401(k) used to calculate the match also be from date of match participation, or rather from the beginning of the year?

[K2retire]

Your document should specify. Our plans that have similar provisions use comp from the match entry date to calculate the match.