prior year testing-no match made in prior year

[cpc0506]

I have a plan that uses prior year testing method for deferrals and match.  Client did not make a matching contribution in 2015.  So, is it correct to say that the match percentage applied to the HCEs for the 2016 year is 0%, so that any HCE who receives a match in 2016, must forfeit the entire match amount?

[duckthing]

For the most part, yes. Can you shift from ADP to improve the ACP results?

An amendment to switch to current-year testing beginning in 2017 might be in order...

[cpc0506]

Client failed the ADP test, but monies were reclassified as 'catch-up' so the plan was deemed to pass.  So, no, we cannot shift match.

[401_noob]

The HCE would only forfeit their entire portion of the excess aggregate contribution if they are 0% vested in the ER match source. 

Hope this helps!

[401_noob]

To clarify the above response, if matching contributions treated as an excess aggregate contribution are partially vested, the nonvested portion (including all allocable earnings on that portion) are forfeited instead of distributed. 

[Tom Poje]

years ago (2009) I had submitted the following for the ASPPA Q and A (it was #16)

Is it permissible to shift after a correction has been made?

Example:

ADP% ACP%

HCE 7% 2%

NHCE1 4% .75%

1% is refunded to the HCEs, reducing the percentage to 6% (a

passing percentage).

After shifting .75% from both HCE and NHCE, the percentages are as follows (and the ACP test is passed):

HCE 5.25% 2.75%

NHCE1 3.25% 1.50%

IRS Response

Yes, this is permissible. However, the fact that the correction method for excess

contribution refunds allocates the 1% to various participants creates mechanical problems that have not been resolved.

 

so, while your software might not be able to perform the function, it is still probably possible to shift even though you failed ADP test. so, lets say after the refund the ADP was now 4% HCE and 2% NHCE. you shift everything to the ACP test (there is no last day or hours requirement for the match.

if the NHCE receive a 1% match, you now have

4% NHCE and 3% NHCE on the ACP side, so the HCEs could conceivable get a match

on the ADP side since you shifted everything you have 0%, so ADP passes as well 

 

the cautionary note is that opinions expressed at the ASPPA conference might not reflect an actual treasury position.

[EBECatty]

I've received VCP approval to retroactively switch from prior year to current year for ACP testing. Same facts: Year 1 no match for anyone; Year 2 same match formula for all employees. Year 2's HCE rate was compared to Year 1's non-HCE rate (0%) and ACP obviously failed. Plan passed both Year 1 and Year 2 using current year.

[cpc0506]

Not sure it is worth the cost of filing (fees and consulting time) when the 2016 ACP return is less than $400.

[cpc0506]

1 hour ago, EBECatty said:

I've received VCP approval to retroactively switch from prior year to current year for ACP testing. Same facts: Year 1 no match for anyone; Year 2 same match formula for all employees. Year 2's HCE rate was compared to Year 1's non-HCE rate (0%) and ACP obviously failed. Plan passed both Year 1 and Year 2 using current year.

Tom,  I think the issue that you overlooked, is that the plan uses prior year testing.  If I understand you correctly, I would have to shift 2015 numbers to get the ACP test for the HCEs to pass for 2016.

[Luke Bailey]

The employer did make a match in a prior year, right, e.g. 2014, 2013, etc.? Otherwise could use first year rule of 1.401(m)-2(c)(2).

[cpc0506]

41 minutes ago, Luke Bailey said:

The employer did make a match in a prior year, right, e.g. 2014, 2013, etc.? Otherwise could use first year rule of 1.401(m)-2(c)(2).

Section 401(m)-2(c)(2) states: "For purposes of this paragraph (c)(2), the first plan year of any plan is the first year in which the plan provides for employee contributions or matching contributions.".  There have been prior years in which Salary deferral contributions were made.   Does this not dictate that as the first plan year for the plan for all purposes?

[Luke Bailey]

No. "Employee Contributions" means after-tax contributions. See Treas. reg 1.401(m)-1(a)(3) as referenced in the m-5 definitional reg.

[DPL]

So if plan is several years old AND employer made no match in 2016 AND plan uses the prior year testing method AND there is no shifting that can be done, then allocate the 2017 year - end match to all who are match-eligible including HCEs.  Then the test fails and you refund the HCE vested match. Correct?  Some say don't allocate the match in the first place, but what is the basis for that?

[BG5150]

The regs say "plan provides for..." which means match is in effect even if the company does not make any match contributions.