Reverse Borrowing/Shifting

[justatester]

Trying to clarify the use of QMAC in the ADP Test.

Here is the situation:

ADP HCE=7.0 NHCE=4.10

ACP HCE=2.0 NHCE=0.9 (this is a QMAC)

Can I reverse borrow/shift the .9% of the NHCE Match to the ADP test? Result would be NHCE average of 5.0..So my ADP test would pass.

Then "Shfit" 2.0 from both the HCEs & NHCEs over to the ACP side so that would pass at 4/2?

Something seems fishy. I didn't think you could "reverse borrow" if it cause an ACP failure? Something also tells me bring the NHCE acp down to 0.0% is problem as well.

Any thought would be greatly appreciated!

[ETA Consulting LLC]

As a rule, you cannot test a QMAC in both the ADP and the ACP tests. So, those dollars that are tested in ADP cannot be turned and used in the ACP test. So, when you shift (borrow), it would be difficult to argue that you're only moving the deferrals. I "think" this is where your approach fails; as it would be easy to argue that a prorated amount (deferrals and QMAC) was included in the shift back to the ACP test (causing the same QMAC dollars to be tested in both ADP and ACP).

Good Luck!

[justatester]

Is there a rule that ACP portion of the test must past prior to applying "reverse" borrowing? If so, do you know where I can find it?

[ETA Consulting LLC]

Is there a rule that ACP portion of the test must past prior to applying "reverse" borrowing? If so, do you know where I can find it?

There is no "reverse" borrowing. There is only a rule that says "Qualified Employer Contributions (whether QNECs or QMACs) may be tested in "either" the ADP or ACP test, but the same dollar may not be tested in both.

When you apply this rule to what you are attempting to do, using a QMAC to pass the ADP test and then incorporate shifting of deferrals to the ACP test, there is a argument that you've effectively shifted "qualified employer contributions" in that process. It's very agressive.

Good Luck!

[Tom Poje]

besides sounding like a greatly contrived example...

which is fine because many times that leads to good discussions.

since no mention was made of QMACs to the HCEs that implies the following

HCE ADP 7.0 NHCE 4.1

HCE ACP 2.0 NHCE 0.0 (so no was eligibile for a match)

then they make a QMAC of .9

unless the document was specific (and I recall one from years ago that indicated a QMAC would be made, and it would be used in the ADP test) then you could have used the QMAC in the ADP initially.

at that point yes you would pass ADP, and by shifting deferrals only (none of the match) it looks like you could pass shifting deferrals only.

but I wonder if you could actually shift deferrals. while its true it is generally only done on paper, one still has to be eligible to receive a match to shift that individuals deferrals. (as answered at an ASPPA conference a few years ago) since no one was eligbile for the initial match that might be a problem (even though magically the people are eligible for the QMAC. that might not pass the smell test.

But lets suppose the entire match was a QMAC including HCEs. Then how would some end up in the ACP test (HCEs only) and the rest in the ADP test (NHCEs only) that is also rather convoluted and it begins to smell as well.

[justatester]

Ok...I am not finding anything in the regs that say you can or can't do this. I find it interesting in the regs and in the ERISA Outlne book-all the examples begin with a "passing" ACP test. So it seems to me it might be a requirement?

Also, it appears this issue may have been addressed in the 2011 Q&A Session. (question 30) Does anyone have a copy of that question?

[Tom Poje]

as i recall, the issue that was addressed there was a plan that failed ADP. corrections were made so it now passes the 2 test.

then could you shift and the answer was yes.

this is different in which you are starting with a premise that a QMAC is made to the ACP test.

again, unless the document was specific, the initial QMAC could have been made to the ADP test, so at that point you aren't shifting to the ADP test as you put forward

but I would also agree with earlier comments that you couldn't use the QMAC in both tests, the regs are clear on that.