ADP - the company not the test...but the test too...

[Bird]

Does anyone know enough about the ADP "system" to know how to get ownership into it? I was sitting down with a prospect yesterday and sure enough, all tests show the owner and his wife as NHCEs since they haven't been over the comp threshold. I tried to explain to him that the tests were all wrong and he should at least get the info into the system so it would at least be right for this year before we take over and do it right (I got a blank stare and then 5 minutes later he asked if he should increase his contributions).

Anyway, while you expect that result when a novice is "running" their own plan, you would think that someone with 25+ years of experience could find the place to enter that info, but it all appears to be grayed out in "view only" fields.

I'm actually just whining and not expecting an answer, sorry. It's just so frustrating to see the level of questions posted here with the strong (sometime overzealous and silly!) desire to get things right, and then you think of the...thousands?...of plans with bogus reports saying "The plan PASSES the ADP test" and whatnot.

[shERPA]

ADP produces a comprehensive set of testing reports - but every plan I've ever looked at has the same issue - HCEs not properly identified. Sponsor sees the plan "Passes" and doesn't read any of the caveats. The last one I looked at had 17 employees over $200K but none were identified as HCEs in the test. Guess what, it PASSED!

[K2retire]

And, of course, when you do it correctly you will be the bad guy.

[ETA Consulting LLC]

The MAIN issue, in my mind, is that the sponsor gets a huge manual that explains how to code employees who meet certain criteria as HCEs. This, effectively, puts the onus on the client to learn IRC Section 414(q) inside out and then code their employees properly. There is, apparently, no due diligence when the client does not.

It can be easily argued that when working in the service industry, you must actually provide the service with skill and care. Then, again, we do live in a Marketing era; so more of these things are governed by appearance rather than competence. My favorite quote in business was from W. Edwards Deming, "Don't confuse activity with achievement." This speaks directly to ShERPA's comment. You can produce 1000 pages of reports, but they are worthless (beautiful, but worthless) if they are not accurate.

Many of us have studied hard to learn how to accurately test a plan for non-discrimination. In many environments today, the actual knowledge is undermined while the value is placed in the ability to operate a computer. It scares the heck out of me, but then again has compelled me to start my own practice.

Sorry for the vent, but this is something that has been eating away at me for at least 15 years now.

Good Luck!

[BG5150]

The thing about HCE determination is that's it's a pretty simple calculation, and any record keeping system made after 1984 should be able to handle it. All you need is last year's compensation and ownership and family information.

[ESOP Guy]

One can rant and rail against companies that make the client determine the HCEs but my experience has been those clients mostly bring it upon themselves.

I have always worked for TPA firms that were full service and tended to pride themselves on being technically very sound. We were almost never the cheapest player in the field. Starting some time in the '90s those kinds of TPAs really started to shrink and leave the field or went out of business it seemed. The reason was simple many of the plain plans that just wanted a simple 401(k) plan wanted it to be cheap also.

Along came companies that offered very cheap services.

Some did it by only offering a very small set of prototype plans with very limited plan provisions. They got the costs down by being able to train fairly low paid people how to use a simple flow chart. If the client has a plan type A then this is how distributions work. No one worked on a client. Instead you had distribution clerks and contribution clerks.... all of them worked for a fraction of what a person like me would be paid.

Another group did this by pretty much subsidizing the TPA work with the assets management fees they were getting on the investments.

Anther group did it by making the client do the "hard" work. The client was forced to fill out long questionnaires that basically meant they were determining who was an HCE, who could be excluded from coverage and so forth.

There were in fact some that pretty much did all of the above.

And they were cheaper then us often times by a good amount. So we lost client after client to these low cost providers. On a regular basis the year after they left we could get panicked calls from the former client saying their ADP test either failed/passed when it had never done that before. They wanted to know had we done it wrong in the past or the new person doing it wrong now. We could justify our work. We even won some testing business back but not very often.

I got laid off twice during this time period to TPA firms losing their business to these types of competitors. So in many ways I don't have tons of sympathy for those clients. They got the service they paid for by going cheap.

This is part of the reason I now only work on ESOPs. So far no one has figured out how to do the above to this part of the business. The margin are higher then 401(k) TPA work. I so happen to find ESOPs more interesting then 401(k) plans also. I also found I could get a job with as little as sending one resume out when laid off if I knew ESOPs as it is a much rarer skill then 401(k)s.

So that is my rambling story but to repeat my main point. My guess is ADP doesn't charge the client much for the service and the client thought they were being smart by saving so much money. Now they are learning they got what they paid for-- sorry if this comes across as a little bitter. I don't think I am but I am tired of seeing people thinking someone could do the work I was doing for 30% less and the quality wouldn't go down.

[ETA Consulting LLC]

I believe the plan sponsors deserve a little better; despite the 'so-called' lower fees. I've personally seen the most incompetent TPAs charge the highest fees; under the auspices of getting what you pay for. I left several TPA firms when it became clear there was no commitment to quality; and I'm talking borderline ethical violations. But, to your point, I agree that quality has been diminished by these large turn-key providers who value bodies over skill. This has become an unfortunate part of our culture.

Good Luck!

[hr for me]

I'll go out on a limb...anyone that chooses a payroll company to administer their benefits and do nondiscrimination testing deserves whatever problems they get in the future. ADP has not been a favorite since back in the early 90s.....when I was the one of the benefits admin/consultant side of many client's ADP payroll processes. At that time they couldn't even put out good deferral data. They weren't testing or administrating at the time. It always surprised me when I heard they moved into the admin space.

[Bird]

Coincidentally, just got more info on a takeover plan from my other favorite, Paychex. My questions about other participants and other locations were met with a dismissive "well they are part time so they aren't in" - of course the plan doc says immediate entry.

[shERPA]

Good comments here and I think they present an accurate assessment of the market. Yes, HCE is not a complicated determination, but people who do not practice in the compliance area don't always understand the distinction between the dictionary definition of a term vs. the code or ERISA definition.

People see the phrase "highly compensated", and assume it doesn't apply to the owners' spouse and/or kids making $25K per year because $25K is not a high wage. Likewise many companies have key employees, but they are not always "Key Employees" as defined in 416, and vice versa.

[Earl]

Same experience with ADP & Paychex both. Even worse is the way they ignore Key status.

Nothing better than telling a client "You have been Top Heavy for the last 3 years." Talk about a blank stare.

[Mike Preston]

I don't know why everybody is complaining so much about the inexpensive providers. My business is well served by work that has to be done to fix plans where just the sorts of things already described have taken place.

And to all those who think that determining HCE's is an easy task I challenge them to read the regs and develop a spreadsheet for the task, especially if using the top-paid group election.

I can count on one hand clients I've lost over the years to inexpensive providers.

[ETA Consulting LLC]

Don't get me started. There isn't an algorithm created that can perform accurate HCE determinations in all instances. Case in point: Father owns 4% of a company. His son owns 1%. His daughter owns 1%. His brother owns the other 94%. No one makes 6 figures. The father and his brother are the only HCEs. I haven't found a recordkeeping software that could solve this 'one in a million' analysis to come up with the right determination.

At the end of the day, I feel much better knowing the few rules that I do know and not merely being a computer operator.

Just thinking out loud :-)

[BG5150]

^ Relius wouldn't calculate it correctly?

[Bird]

I don't know why everybody is complaining so much about the inexpensive providers. My business is well served by work that has to be done to fix plans where just the sorts of things already described have taken place.

I've benefited from that too Mike, but have also had someone decide to stay with Paychex when I explained to them that their spouse is an HCE and Key and they were really failing the ADP test (and, minor detail, owed TH contributions because the plan was TH). Their business model is predicated on low IRS audit rates. We (small shops) should probably be encouraging the IRS to gather provider info rather than fighting it. (I'm not honestly sure I'm "there" yet but just sayin'...)