ADP/ACP Testing Question

[Guest JWBrown]

I don't believe that setting a termination date creates a plan year end. Rather, when the final assets of the plan are distributed, then a year end occurs in conjunction with the final distribution.

What is their regulatory basis for creating a plan year end with the termination date?

[Guest Gibson]

We set a termination date for a 401(k) Plan for 3/31/99. As of that date, all contributions to the plan stopped. On 10/15/99, account balances were paid out. However, as of today, the plan is still not "terminated," in that there is still some forfeiture money left in the trust. The TPA recently provided us with the ADP/ACP testing results for 1999. The tests failed. In performing the tests, the TPA prorated the 401(a)(17) annual compensation limit to $40,000, concluding that setting a termination date of 3/31/99 created a short plan year of 1/1/99 through 3/31/99. We would like to argue that the testing should have been done on a full plan year basis, and that the compensation limit should have been the full $160,000. Can we do this? Any authority would be helpful. Thanks.

[Guest VPA]

It is my understanding that the only time a short plan year may occur is in the initial plan year (ie: plan is established 6/1 with a 12/31 plan year end) or the plan year is amended. For terminating plans, I believe that you should test for the full plan year.

Also, check your plan document for the definition of the compensation period. The only time that the compensation dollar limit is prorated is when the compensation period is defined as the plan year and the plan actually has a short plan year. If the compensation period is defined as a 12-month period (ie: the calendar year coinciding with or ending within the plan year) then the compensation dollar limit is not prorated. This information is from the ERISA Outline Book from Sal Tripoldi.

[Guest tforte]

Questions for contributor VPA:

You said in your response that the only time you can have a short plan year is in the intial year or when the plan year is amended.

What happens if the 401(k) plan is terminating because the company dissolved and the employees were only compensated for the first three months? The trustees subsequently decide to terminate the plan a month later and all assets are distributed. This creates a short plan year for testing and reporting purposes, correct?

What about if the plan was involved in a merger resulting from a stock purchase in which all assets were transferred to the recipient plan in say September. The employees of the original plan were paid until July at which point the acquiring company took over payroll. You would have a short plan year for reporting purposes (January to September when all assets were trasnferred) for the merged plan whereby you would file the final 5500. Wouldn't you also have a short plan year for testing purposes?

[Guest VPA]

Thank you for the additional situations. I should not have qualified my answer with "only".

In situations regarding plan mergers, the administrator also has the option of testing the plans as if they were a single plan for the entire year. There are no regulations that specifically address this so it seems they can perform testing either way.

[Kirk Maldonado]

Remember that if you change the plan year, that will change the deadline for filing the Form 5500.