ADP/ACP failures with prior year tests should not happen but

[Guest Ed W]

ADP/ACP failures with prior year tests should not happen but --- happens. As we all know some clients don't pay attention! Need feedback from the experts, Thanks.

Problem:

Failed ADP/ACP tests using prior year test.

Fail even worse using current year.

december,2000 plan

1 If we make a QNEC of 3%, we still apply last year test? It is now more than 12 months after the 1999 year end.

2 If yes, can we use this 3% to satisify top heavy for this year at the same time?

3 If QNAC that takes care of the current 3% TH is more than needed can we use MUT to satisify ACP/ACP or do I need QMAC also?

4 I assume I use last year pay to caculate QNAC? What to do about Terminated participants? I guess I need to give them the QNAC also!

5 From a record keeping basis I assume the QNAC shows on the particitants accuount for 2000 and I dont have to redo any 1999 work?

thanks

[Richard Anderson]

1. I assume that the plan year that you are doing ADP/ACP testing on ends 12/31/2000. If you use prior data for testing, then you are using data for the NHCEs from the plan year that ended 12/31/1999. In order to use QNECs in the prior year data, the QNEC would have to have been deposited by 12/31/2000 and allocated to the plan year ending 12/31/1999. So, the answer is no, you can not allocate QNECs to the 12/31/1999 plan year, in order to use for prior yesr testing, unless they were deposited by 12/31/2000.

2. I believe that the QNEC would be able to be used for TH minimums in the year allocated. I don't think that you could allocate the QNEC for one year for ADP testing purposes, and then since the deposit was in the year following the allocation, use it for TH minimums in a different year from the year of allocation.

3. I'm not sure I understand this question, but, I'll answer anyway. If you mean for example that the QNEC to pass the ADP is 4% and you only need 3% for TH, can you use 4% of the QNEC for the ADP test and then also use 1% for the ACP test, then the answer is no. But, for example if 4% is allocated as a QNEC, and only 2.5% of it is needed to pass the ADP test, then the other 1.5% can be used for the ACP test.

4. A QNEC, as any other contribution, is allocated per the plan document. Read the document. it will tell you how to allocate QNECs. It may even say that QNECs are not allowed. We have a few plans where the documents say that the only allowable correction for a failed ADP/ACP test are distributions of excess contributions.