Prior year testing for first plan test

[30Rock]

Safe harbor 401k plan has a prior inactive discretionary match. For 2026 they are removing the safe harbor match and reinstating the discretionary match. Can the plan document use prior year testing under the first plan year method in order to assume 3% for NHCE’s for purposes of the ACP test? I was thinking no since there has previously been a discretionary match and adding it back does create a first plan year. But as always I appreciate your feedback!

 

[JustSayin]

My knee jerk reaction is that the prior year discretionary match percent for testing is 0%.  This is not a first plan year, as indicated by prior year Form 5500s filed.  Also, the source was inactive, it is not "new".  

I'll let others give you the citations.

[CuseFan]

I'm some years removed from that sort of detail, but as a SH design by definition is current year testing, so you'd have to have been SH or otherwise current year for five years (if the below is as intelligent as advertised). If that was the case and you could change, why wouldn't the applicable prior year ACP be the ACP as calculated with the SHM? Say they had a stated non-SH match and switched to discretionary match, you would use the ACP from that stated match, how the match is determined is irrelevant in that regard, is it not? A match is match is a match.

AI Overview

To change from current year to prior year testing for a 401(k) plan, the plan document must be updated, and you generally must have used current year testing for at least five consecutive years or for the plan's entire existence. This change is restricted by IRS regulations to ensure plan consistency. 

[CuseFan]

And if you haven't been current year testing (SHM or otherwise) for five years, I think you need to stay current year on the change to discretionary match until you hit five years.

Unless there is some exception to that requirement when moving away from SH plans of which a more knowledgeable contributor to this forum may be aware.