I have an established 401(k) Plan that uses prior year testing. This

[Guest Amy Keen]

I have an established 401(k) Plan that uses prior year testing. This is the first year the ER has contributed. What do I use for prior year ACP for NHCEs??

[Guest RJM]

The greater of 3% or the current year test results for the NHCs. Same number is used for next year's test.

[wmyer]

Can you give us some clarification, Amy? If there's ACP testing, there's either matching or post-tax and that we're talking about a traditional 401k plan. If there's matching, what was the effective date of the amendment which added the matching feature? For example, if the matching feature is effective for the 2000 year but wasn't in effect for the 1999 year, and you're using prior year results, then 3% is used for the prior year NHCE average. The way you worded the question, though, leads me to believe that the matching feature may have been in effect earlier.

[Guest Amy Keen]

Reply to RJM: Thanks for your answer -- that's what I wanted to hear, but can you give me some backup for it? Where did you find this -- I've really been searching for this answer.

Reply to WMyer: This is a 401(k) Plan that allows for discretionary Profit Sharing and/or Match. The ER has always had the option to contribute, but has only chosen to contribute for the first time this year (10/1/99 - 9/30/00 fiscal plan year end)

[Guest RJM]

IRS Notice 98-1.

[wmyer]

I would likewise refer to IRS Notice 98-1, §5, but the prior year ACP you should use is 0%, not 3%. IRS Notice 98-1 allows you to use 3% as the deemed prior year NHCE ACP average in the first plan year. The notice further specifies that "For purposes of the ACP test, the 'first plan year' of any plan is the first year in which a plan...is or includes a §401(m) plan, i.e. the first year a plan provides for...matching contributions described in §1.401(m)." From what you've said, this is not the first year that the plan has provided for matching contributions, even though it's the first year that matching contributions are being given. Using prior year results, the NHCE ACP should be 0%.

[Guest Mr. X]

I agree with wymer. Sorry it is not what you want to hear.

[Guest Amy Keen]

RJM: Thank you for the reference. I printed off a copy of the Notice, and unfortunately, I don't believe the "3% rule" applies since the Notice states that the 'first plan year'is the first year in which a plan PROVIDES for matching contributions -- not the first year the match is actually contributed. This plan has had a discretionary match feature since inception. Thank you for your kindness -- yours was the first concrete info I found on the subject.

[Guest Amy Keen]

Just posted my reply to RJM and say Mr X and W Myer. Thank you all -- not what I wanted to hear, but reassuring to see that we're all on the same page. At least I feel comfortable with my answer. My first day on the Benefits Link. What a great resource!

[Guest shafter]

About May 31, 2000 there was an article "27 reasons to use the Current Year Data Method in ADP/ACP Testing" by Cheryl Morgan appeared on this site (at least that is the date I printed it). This very problem was one of the reasons and resulted in our changing our advise to clients with discretionary match formulas.

[MR]

Not to intrude here, but can't Amy still switch to current year testing for the ACP test? If its a prototype plan, she'd have to switch to current for both tests, but that might not be so bad. Just ask Cheryl Morgan.