Switching between current and prior year testing for ADP/ACP tests

[Guest sammy]

An individually designed 401(k) plan has been amended for GUST, but has not been submitted to the IRS for a favorable determination letter. Plan was amended to provide for prior year testing for ADP/ACP testing. Plan administrator is now doing ADP/ACP testing for the plan year that ended 6-30-2000. Plan fails the ADP/ACP tests based on the prior year testing, but would pass if current year testing were used.

Because we are still in the GUST remedial amendment period can we amend the plan to provide for current year testing for the 2000 plan year only?

[Nate X]

As a thought, switching from the prior year method to the current year method should never be a problem. It's more of a problem when you go to from current to prior. But, in any case, since it is still in the remedial amendment period, I don't see a problem doing a retroactive amendment. You may want to think about doing it as a "window." Amending the plan just on the determination date to allow for current year testing and then changing it back to prior year method. Since the plan year-end is 6/30/00, I don't see any problem with doing that.

[Guest jhinkle]

Sammy, I have a similar situation and was wondering if you had found any authority for making retroactive amendments for testing purposes.

I have a Plan that used prior year data for testing since 1997 but increased its match in 2001 and, as a result, is now failing on prior year testing but would pass using current year testing. If the Plan is amended before Feb. 28th, is it ok to switch to current year testing for 2001.

[Guest sammy]

I think we decided to go ahead and do it based on IRS Notice 98-1.

Notice 98-1 provides that a change can always be made from prior year to current year testing (prospectively anyway), but that a change from current year to prior year testing can only be made in certain circumstances, one of which is if the change occurs within the Plan's SBJPA remedial amendment period.

Here, I assume you would be changing from prior year for 2000 to current year for 2001 and back to prior year for 2002. If the 2002 plan year is part of the plan's remedial amendment period, (i.e., you are not an individually designed plan) I think it would be OK. It may still be OK if you are individually designed if the amendment is signed before 2-28, but I'm less confident about that without thinking about it for a while.

hope that helps

[Guest jhinkle]

Sammy, thanks for your response.

The plan actually is an individually designed plan so we would be hoping to do it by virtue of having it amended before 2/28. I believe the plan would prefer to have current year for just 2001, although they have indicated they could probably live with current year method going forward if they had to.

I would appreciate your thoughts regarding whether the fact that it's individually designed with a 2/28 deadline would really make a difference regarding the retroactive nature of the amendment?

[Richard Anderson]

I think that your GUST remedial amendment period ends when you adopt a GUST approved document.

[Guest jhinkle]

Richard,

Thanks for your response regarding the amendment period. Notice 98-1 generally allows plans to switch from prior to current year at anytime (even outside the RAP). Do you have any experience with plans making such switches retroactively (e.g., amending now to use current year for 2001). While I would prefer to make the amendment during the RAP to get the benefit of whatever protection that provides, I suppose my real question is whether there is any concern with a retroactive amendment in this situation whether or not its outside of the RAP. I would think this situation would arise fairly frequently but haven't found much guidance. Thanks.