Reverse Borrowing in First Plan Year

[justatester]

I have a start up 401(k) Plan. The client previously had a DB/403(b) plan. Both are now frozen. The plan is failing the ADP/ACP test. The match in the plan is qualified..therefore is available to reverse borrow. My question is if the plan's testing method is prior and they decide to use the "3%" option for both ADP/ACP, can I borrow the extra from the ACP to improve the ADP results?

HCE ADP 6.13 ACP 2.59 So, if I use 3% for ACP I have an excess of 1.7%. Can I add the 1.7 to the deemed 3% to get an NHCE average of 4.7 which would be a pass?

[ETA Consulting LLC]

HCE ADP 6.13 ACP 2.59 So, if I use 3% for ACP I have an excess of 1.7%. Can I add the 1.7 to the deemed 3% to get an NHCE average of 4.7 which would be a pass?

Sure. Generally, if something is deemed (i.e. deferral) you'd treat is as if it actually happened for all instances "except " where it is physically impossible (e.g. actually making a distribution of those amounts). So, you should be fine.

Good Luck!

[Tom Poje]

perhaps I am reading more into this than what is intended.

You said the plan is a start up plan, which to me implies it is the first year of the plan.

therefore the plan either uses prior year testing (in which case, since there were no contributions in the prior year it would use 3%)

or current year testing, in which case the currect year QMAC is used in either the ADP or ACP test.

I don't see how you can combine a 'current year QMAC' with a prior year 3%.

[ETA Consulting LLC]

I'm under the impression he's just talking about 'shifting' deferrals not needed to satisfy ADP to the ACP test.

[justatester]

What we want to do is shift the "ACP" to the ADP? Can we assume that the deemed 3% contributions was a QMAC even though the plan did not exist prior to 2012?

[Tom Poje]

I realize the ERISA Outline Book speaks of shifting QMACs to the ADP test, but I have never thought of them that way.

It was my understanding a QMAC is used in either ADP or ACP. (or both assuming seperate contributions) It is not made to the ACP and then 'shifted'. (That doesn't seem any different than a QNEC which is made either to the ADP ot ACP, and not to the ADP and then 'shifted' to the ACP test.)

And since you can't 'double' up on Qcontribution (use the same contribution twice) I'm not sure if you can shift such a contribution.

(but my opinion only)

[ETA Consulting LLC]

There is no mention of QMAC. We're just saying that deferrals may be used in the ACP test when they aren't needed to pass ADP. So, once you get the ADP test to pass, you can shift the deferrals that were not needed to the ACP test in order to boost the percentages. This is irrespective of QNEC or QMAC.

I'm not sure we're speaking of the same thing.

[ETA Consulting LLC]

Okay, my bad. He's actually talking about testing "Employer Matching" contributions in the ADP test; not testing "Elective Deferrals" in the ACP test. That's not borrowing or reverse borrowing; it's just insane. If you want to test an Employer Contribution in the ADP test, then it would need to meet the conditions of a Qualified Employer Contribution (which requires immediate vesting). You can't immediately vest in something that doesn't exist; not even if it is 'deemed' to exist.

My bad

[Mike Preston]

Can you lay out the math that gets you to 1.7%?

I think the terms of the plan control. So if the match is qualified, the prior year deemed 3% should be treated as qualified. Unless there is a reg provision that specifically says something to the contrary. I don't have time to scour the 401(k) regs on this issue, so you should.

[ETA Consulting LLC]

Can you lay out the math that gets you to 1.7%?

I think the terms of the plan control. So if the match is qualified, the prior year deemed 3% should be treated as qualified. Unless there is a reg provision that specifically says something to the contrary. I don't have time to scour the 401(k) regs on this issue, so you should.

He was basically saying that given an average HCE rate of 2.6%, only 1.3% of the NHCE's match would be needed to pass the ACP test under the 2 plus & 2 times rule. This would leave an extra 1.7% in matching contributions (over what was needed to pass ACP). That's just his math.

Poje was saying that the only way you could use Match in an ADP test would be a Qualified Match, but the deemed 3% is not a QMAC. I, of course, misread the question.

[Mike Preston]

Thanks.

When the OP says that he has a startup plan is he talking about a plan year that has already ended or a plan year that has yet to end?

If this is a 2011 year, there are no longer any choices to be made, because the document must have specified, by 12/31/2011 whether the plan was using prior year testing.

But, getting back to the original question, I don't think it is doable, after reviewing the regs briefly. I also found an IRS site:

http://www.irs.gov/irm/part4/irm_04-072-003.html

that lays it out fairly well. Search for "Use of QNECs and QMACs in Prior Year Testing" and you will find the rule that only QMAC's contributed before the end of the year in question can be used in borrowing. Hard to satisfy that rule if the matching contributions are "deemed" to be 3%.

[justatester]

It is a start up plan for 2012, so we are trying to reduce the failure on the ADP side. The plan document states to use current year method, however we have time to amend by 12/21/2012 to use prior year. The deemed 3% looks like it will be higher than the projected NHCE average. If we go with prior, then we have the option of 3% or actually depending on which is higher.

The "shifting" seems to be very aggressive. I think it would be hard to explain if audited the shifting of a contribution to improve results that was not actually made. Understanding, you can only use the deemed 3% in the first year. So, it is only a one year solution.