Question on "old rule" restructuring + current year/prior ye

[KJohnson]

1) Calendar year individually designed 401(k) Plan has an entry date of the January 1st following an hour of service.

2) There are a number of eligible participants in the Plan hired after 7/1/99 who chose not to defer for 2000.

3)Plan has been in existence for a number of years but 2000 is the first year that the Employer has made a match.

4) 1999 ADP for NHCE's is much better than 2000.

What do y'all think of the following regarding 2000 testing:

A) It appears that I cannot use a first year ACP of 3% since while this is the first year that a match is being made, this is not the first year that the Plan has contained provisions allowing a match.

b) Since this is an individually designed plan I can use current year for ACP and prior year for ADP.

C) I can restructure under the "old rules" for the ACP test using dual entry dates. Therefore, any Participant hired after 7/1/99 could be in a separate testing group since their satutorily required entry date would not have been until 1/1/2001. I could not use "new rule" restructuring because all of these individuals would have a year of service before 12/31/2000.

D) I can resturcture ACP without restructuring ADP (If this is incorrect, how do you restructure on prior year testing).

E) Are there any "consistency rules" requiring restructuring in the future?

Any thoughts or comments would be appreciated.

[Guest]

I am not sure about your argument in point C. Whether or not to apply the plans entry date(s) seems to be a grey area. some people take a conservative approach and say 'yes', the 'otherwise excludable' rule only applies to 1yr/age 21. others (myself included) argue the regs say you have to bring someone in the first day of the plan year or 6 months after 1 year age 21.

you indicated that last years adp was better than this year adp. however, if you still pass using this years adp, I think I would use current year on both adp and acp. we are still in transition period so you could switch to prior method next year.

I realize some argue to always use the current year method, but I like prior method better. granted, where a match is discretionary, you will probably have to end up with current year if company doesn't match every year, but most discretionary matches i have seen are consistent from year to year.

I realize there was an article awhile ago on 27 or so reasons why current year is better than prior year, but some of the arguments presented make no sense. (e.g. any involving QNECs - that is the purpose of using prior year is you know what it takes to pass)

[KJohnson]

Tom, thanks for taking the time to read such a long question. The Plan doesn't pass using current year ADP.

As to the dual entry dates, I was going by the IRS response in Q&A 76 at the 1999 ASPA conference which seemed to state that you can use the dual entry dates for restructuring under the "old rule" but not the new rule. (I realize this is not official guidance).

Any thoughts about D and E? Can you restructure ACP without restructuring ADP? Can you use restructuring on a year to year "as needed" basis?

[Guest]

my understanding (and of course I could always be wrong), is as follows. and hopefully we are using the same terms.

by 'restructuring' you are referring to 'disaggregating otherwise excludable employees'

1. there are now two options available to disaggregating otherwise excludable.

a. old rules - 1 year/age 21 - plan document entry dates irrelevant - but you might have to perform 2 tests because you may end up with an HCE in the otherwise excludable test.

b. new rules - all NHCE less than 1 year/age 21 excludable, no need to perform extra test as there are no HCEs. In this case, it looks like plan's entry dates are relevant.

2. before even getting to the ADP/ACP test, you first perform the 410(B) test. The 410(B) test is perfored on each 'plan', thus you may have a 401(k), a 401(m) and a 401(a) test.

my understanding is that you could test otherwise excludables for the 401(k) but not for the 401(m)since you have 'separate' plans.(don't know if I ever would do it, but it looks like you could do it.) and remember, whatever you do for 410(B) you must apply the same testing rules to the ADP or ACP.

you don't have to use the otherwise excludable option every year, however, if you switch AND are using prior year testing for one of your test, you have a 'coverage' change and must apply the rules set forth in Notice 98-1.(averaging,etc) at that point it might be easier to come down here to Florida and count votes.

I suppose if you got real lucky and had enough 'unused' adp from last year, you could use prior year testing on both tests and 'shift' the unused deferrals to the ACP test. conceivably that could pass the ACP test. doubtful, but I have seen some strange results in plan testing so one never knows.

[KJohnson]

If for my 401(m) portion of the Plan they are covering 100% of all NHCE's under the more liberal eligibility provisions and only NHCEs are "otherwise excludable" then I should still have 100% NHCE coverage in both groups and should be fine with disaggregating otherwise excludables. Right?

If the Plan then used current year for both ADP and ACP testing in 2001 (they have now convicned number of NHCES to defer when they realized their problem for 2000), there should be no coverage change problem because this only applies to prior year testing. Also, because they are still in the RAP they should be able to change between current year and prior year with no consequences (other than being stuck with using current year prospectively assuming no further extension of the RAP). Yes?