ADP prior year test method - only otherwise excludable

[legort69]

Plan is prior year tested. Owners started company a few years ago. They start a plan during 2010. First year they elect to use the current year test method. All non-HCEs are eligible and newly hired during 2010. None have met the statutory minimum requirement for 2010.

For 2010, I test the HCEs (owners) against the statutory NHCEs. Since there are no 2010 statutory NHCEs, the ADP test is deemed to pass for 2010. No real issue there.

The total 2010 NHCE group averaged 5.14%, but non have met the statutory minimum requirement.

{During 2011, only one of those 2010 NHCEs met the statutory minimum requirement on 7/1/11.}

My question is for 2011 testing, when I am now using the prior year test method.

Can I say that since there are no statutory EEs during 2010, then the test is deemed to pass for 2011? Or, do I have to use the 5.14% rate? Or did i miss the boat entirely?

Thanks for any assistance and citations on this. I'm up against an ERISA attorney.

[Kevin C]

If you have access to the current ERISA Outline Book, you can show the attorney Chapter 11, Section XII, Part D, 1.b.1. It says that if you use prior year testing and disaggregate the otherwise excludables for 410(b), you are comparing the statutory NHCE's from the prior year with the statutory HCE's in the current year. Since there were no statutory NHCE's for 2010, I think 1.401(k)-2(a)(1)(ii) says you pass the ADP test.

In the regs, a combination of the definition of "Plan" in 1.401(k)-6 and the prior year testing parts of 1.401(k)-2 should get you there. If the "Plan" you are testing does not include the otherwise excludables, I don't see why you would consider prior year otherwise excludables since they were not eligible under this "Plan" in the prior year.

[legort69]

thank you! the Attorney NOW agrees with how I tested the plan and this helped.

[austin3515]

Hopefully you didn't check the box to use deemed 3% rule. Then you would be limited to a 5% averge for the HCE's.

[Kevin C]

I'd like to clarify that my post above applies only in the situation where both years involved tested 410(b) by disaggregating the otherwise excludables, which is the situation in the OP. If only one of the years disaggregated the otherwise excludables, there are special rules that change the answer. See Chapter 11, Section XII, Part H.4 of the EOB. Those special rules apply if there are coverage or testing method changes between the years.