Prior Year vs. Current Year Testing Method

[Pension Nerd]

I'm hoping someone else remembers this and has a link!

There was an article a while ago (possibly several years) that very helpfully laid out why the current year testing method was better than the prior year testing method.

I cannot find it anywhere!

Does anyone have a link to it they could share?

Thanks!

[Lou S.]

Sometimes prior year testing is better, sometimes current year testing in better, sometimes it is better to use one for ADP and the other for ACP.

It all depends on your demographics, participation rates and whether or not your match varies from year to year or not.

But I'm not sure which article you are talking about.

[Tom Poje]

the advantage of prior year testing is you can tell the HCEs their limit (assuming they all defer the same % or whatever)

the advantage of current year testing is you can allocate a QNEC if you fail (ha, usually it is so much no one wants to do that)

at least on the software we use current year has the advantage of easily running things like "What if I try comp less deferrals for testing.

with prior year testing I'd have to go back and rerun last years report as well.

[BG5150]

*side note* You can allocate a QNEC for a prior year test, too.

BUT: you have to wait more that 12 months after PYE and do it under SCP. (And you really should only be doing this once, as one of the tenets of doing SCP is that you put a process in place to conform to the plan doc.

[Belgarath]

"the advantage of prior year testing is you can tell the HCEs their limit (assuming they all defer the same % or whatever)"

While I absolutely agree with Tom, I find this is often more of a theoretical advantage. How many times have you had clients completely ignore your instructions not to defer more than x%, and they do it anyway!!? Grrr...

But on the bright side, hey, it is more income for fixing their problems that could have easily been avoided if they did what we told them to in the first place.

Sometimes I forget that.

[Tom Poje]

actually, the best I ever heard from a client was

"I defer the max I can, anything that gets returned implies I have indeed put in the absolute max I could into the plan after the refund" - a great client who didn't grumble about refunds.

of course, that works for the owner, but the other HCEs may suffer.

also, this assumes testing was done timely and there is no 10% fee.

agree with Belgarath's comment. in addition, by the time the prior year test is run, and you pass the info onto the client there could already be 3 months of deferral. at that point if you tell someone you can only defer 5% to pass and they have deferred 10% for 3 months it is hard to explain what really needs to be done.

[Pension Nerd]

Happy Friday All!

Thanks for all of the suggestions!

All of these were so eloquently communicated in the article I am trying to find!!!! :-(

I'm not yet ready to give up hope that someone will have it!

[imchipbrown]

I don't have the article. My two cent observation is that you can easily change from prior year to current year but need five years of current years to go back to prior year.