Combining employee elective deferrals and company match contributions

[Guest David_R]

Has anyone heard of combining employee elective deferrals and company matching contributions when performing yearend nondiscrim. testing? For example, instead of performing an ADP and an ACP test separately, you would add the employee elective deferrals and the company matching contributions together and then divide by comp. to obtain a single percentage. Is this possible, and if so under what plan provisions. Thanks

[Guest FredReilly]

If the match is a Qualified Match it can be included in the ADP test. Generally, it will be qualified if it is fully vested and subject to the deferral distribution limitations.

------------------

[Guest]

Fred is correct in regards to using the MAtch in the ADP test. be careful, just because a match is 100% vested does not necessarily make it a QMAC. The distribution rules for a QMAC are different than a match that is 100% vested.

The other option is to use some or all of the deferrals in the ACP test. The most common term I've heard used is 'shift' when using this method.

Make sure the document allows this!!! Check the definition for the ACP test. it should say, something to the effect "....and elective deferrals not used in the ADP test"

There are some rules regarding this.

1. The ADP test MUST pass the 2 test before 'shifting' any deferrals.

2. The ADP test must pass the 2 test after 'shifting' the deferrals.

(My understanding is that it is a 'paper' shift. In other words, you don't actually 'move' $ around, it is more of a mathematical deal)

You can shift all deferrals if you want - see 1.401(m) - 1(d) example 3 (iii)

Generally the best shift is to reduce the HCEs to 4 and the NHCEs to 2. (note: this passes the two test) whatever you have moved

is now used in the ACP test.

The amounts you shift can be different - e.g. 1% for the HCEs and 2% for the NHCEs.

To get a hard copy of the results I use an excel spreadsheet, though I have one for the software I use that works in most cases. (I have one or two situations that might not work)

PLEASE! make sure you understand the rules.

there was a note here earlier about someone who 'shifted' without the ADP test passing the 2 test before hand. While his end results passed, I do not see how the regs permit this.

My understanding is that the ACP test does not have to pass the 2 test before the shift.

also, you must be consistent - both ADP and ACP tests must be current year, or prior year. Not one of each.

[This message has been edited by Tom Poje (edited 06-07-2000).]

[Guest RJM]

To combine deferrals and Company Match into a single ADP test, the Match must be 1) a Qualified Match (QMAC or QMC) addressed by the Plan and 2) if discretionary, must so designated by the Employer. A QMC is 100% vested and subject to Withdrawal Restrictions (termination, age 59-1/2, etc.)

If the Match is NOT a QUALIFIED match, you have the "Borrowing" or "Shifting" option.

The following is from an internal testing checklist: (MUT=Multiple Use limitation Test)

"Verify if the operational Shifting Method is an option. The regulations provide that elective deferrals may be

considered in the ACP test as long as the ADP test is satisfied both before and after shifting occurs (see below).

You pass the ADP but fail the ACP.

Or, you pass the ACP but fail the ADP.

If you are passing the MUT, the Shifting method allows the 'excess passing percentage' to be moved from ADP to ACP or vice versa.

Rule #1: You have to be able to pass the MUT.

Rule #2: If you pass the ADP, you can move the ADP percentage not needed to ACP anytime.

Rule #3: You can only move un-needed qualified ACP to ADP.

Percentage to Shift:

From NHCE’s ____ to ____ New ADP: ____ New ACP: ____

The plan __passes __fails using the shifting method. If failure, continue."

Note that Borrowing is simply a documented "paper" move. No individual Participants are affected.

If you like the qualified match idea, look into a ADP Safe Harbor match and possibly eliminate AP/ACP testing altogether.