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Strange question re ADP testing


Belgarath

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Plan excludes bonuses. Plan passes 414(s) test, even excluding bonuses - HCES take big bonuses. Plan passes ADP testing excluding bonuses.

Question has been asked as to whether the plan can run ADP test based on full compensation. Well, it CAN, (plan operationally allows for employer to elect any other definition of comp as long as it passes 414(s))  but why would they want to do that? Any ideas as to why this might be beneficial? I'm not seeing it offhand... maybe allowing some shifting to the ACP test by creating more room under the ADP test? 

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If the bonus inclusion lowers the ADP of the HCEs more than lowers the ADP of the NHCEs then it would beneficial in passing the test. But if it already passes the test without it, then I don't see a point in re-runing unless ACP fails and running with improves ACP.

If most of the HCEs are over the comp limit with or without bonus, it probably hurts testing. But in some cases I could see it being helpful. I think each situation might be different. But to use an quick example say base pay is $200K and bonus is also $200K and the HCE defers the max of $22,500 for 2023. Testing on base pay gives an ADR of 11.25% for that HCE, testing on total comp (limited to 401(a)(17)) gives and ADR of 6.82% for the same HCE.

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Gotcha - I just couldn't, offhand, see why they would bother if they already passed, but this clears it up. It's been a long week, and my brain obviously needs recharging!

Thanks.

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Maybe the thought is for future years, and that using a higher testing comp for primarily HCEs will give them more deferral room in subsequent years if some had been held back previously?

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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