Prior Year Testing Method

[TH 401k]

In prior year, ADP ACP Non-discrimination test and coverage test is taken in disaggregate method.

I have taken both coverage and ADP ACP test disaggregate method. However, my ADP ACP is passes in disaggregate but coverage is failed in disaggregate. But the coverage is passes in aggregate method.

As per my understanding, it is not permissible to change the method of ADP ACP testing from disaggregate to aggregate because the plan follows prior year Testing Method. 

Is it permissible to take coverage test in aggregate method to make the test pass. Is there any provision in IRC regarding this scenario.

Thanks in advance!!!

 

 

[C. B. Zeller]

When you say "disaggregate method," you're referring to the permissive disaggregation of otherwise excludable employees - correct?

You can elect to use this option or not on a year-to-year basis; it is not required to be specified in the plan document.

If you disaggregated otherwise excludables last year, but you don't want to this year, then you will need to re-calculate last year's NHCE ADP on a non-disaggregated basis to use in the current year's test.

[TH 401k]

11 minutes ago, C. B. Zeller said:

When you say "disaggregate method," you're referring to the permissive disaggregation of otherwise excludable employees - correct?

You can elect to use this option or not on a year-to-year basis; it is not required to be specified in the plan document.

If you disaggregated otherwise Excludable last year, but you don't want to this year, then you will need to re-calculate last year's NHCE ADP on a non-disaggregated basis to use in the current year's test.

Yes. permissive disaggregation of otherwise excludable employees. 

If I take in ADP in non-disaggregated, the plan fails but if I take ADP in permissive disaggregation it pass. However my coverage test fails in permissive disaggregation.

Whether I can take ADP ACP in permissive disaggregation and coverage test in non-disaggregated. 

[C. B. Zeller]

18 minutes ago, TH 401k said:

Whether I can take ADP ACP in permissive disaggregation and coverage test in non-disaggregated. 

No. You must use the same aggregation/disaggregation options for coverage and ADP/ACP.

If you are using the ratio percentage test for coverage, and it fails, have you looked at the average benefits test?

[TH 401k]

12 minutes ago, C. B. Zeller said:

No. You must use the same aggregation/disaggregation options for coverage and ADP/ACP.

If you are using the ratio percentage test for coverage, and it fails, have you looked at the average benefits test?

Yes. average benefits test also fails. 

Is it not permissible to use different method for different non discrimination test (i.e., Permissive disaggregation for ADP ACP and Non disaggregated for coverage test).

Can yo advise what is the best way to make all non discrimination test pass.

 

[C. B. Zeller]

If the test fails, it fails. Since it's prior year testing, you don't have the option to contribute QNECs to make the tests pass. At this point you are looking at refunding the excess contributions and excess aggregate contributions for the HCEs. Nonvested excess aggregate contributions for HCEs would be forfeited instead of refunded.

[TH 401k]

21 hours ago, C. B. Zeller said:

If the test fails, it fails. Since it's prior year testing, you don't have the option to contribute QNECs to make the tests pass. At this point you are looking at refunding the excess contributions and excess aggregate contributions for the HCEs. Nonvested excess aggregate contributions for HCEs would be forfeited instead of refunded.

Yes. Thank you!!!

If possible clarify the below points

"My senior recently explained the concepts of aggregate and permissive disaggregation method. If the coverage test is performed under permissive disaggregation, all non-discrimination tests should also be performed under permissive disaggregation.

If the coverage test passes in aggregated method but fails under permissive disaggregation, and the ADP/ACP pass under permissive disaggregation but fail under the aggregated method, it is acceptable to proceed the ADP/ACP tests under permissive disaggregation and the coverage test under the aggregate method.

He mentioned that there is no need to perform the coverage test under permissive disaggregation because we have  performed the ADP/ACP tests under permissive disaggregation. In this case, we can simply pass the test by performing the coverage test using the aggregate method."

[C. B. Zeller]

1.401(k)-1(b)(4)(iv)(A) says that if a plan is using the option to disaggregate otherwise excludable employees for 410(b), then it must also disaggregate for ADP testing. There is nothing that permits disaggregation for ADP if the plan is not utilizing the disaggregation option for 410(b). A similar rule is found in 1.401(m)-1(b)(4)(iv)(A).

1.401(k)-2(a)(1)(iii)(A) and 1.401(m)-2(a)(1)(iii)(A) provide for a special "early participation" rule that allows you to include otherwise excludable HCEs (but not NHCEs) in the ADP/ACP tests. But again, this only if you are using disaggregation for 410(b).