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Multiple ER 401(k) with a 1/1 plan year has 8 adopting employers.

  • Employers 1, 2, 3 & 4 are all part of the same controlled group and are tested together in what we'll call plan "A".
  • Employers 5, 6, 7 & 8 are all part of the same controlled group (and all unrelated to employers 1, 2, 3 & 4) and are tested together in what we'll call plan "B".
  • The MEP uses the prior year testing method.
  • The 2022 NHCE ADP average for plan "A" was 3.5%
  • The 2022 NHCE ADP average for plan "B" was 4.1%

In February of 2023, ownership changes occur and employer 8 moves from plan "B" to plan "A". So as of 2/1/2023, Employer 8 is no longer related to employers 5, 6 & 7. They are, however, now related to employers 1, 2, 3 & 4. Therefore, 1/1/2023 to 12/31/2023 ADP testing looks like this:

  • Plan "A" consists of employers 1, 2, 3, 4 & 8
  • Plan "B" consists of employers 5, 6 & 7

How does each plan determine the prior year averages on the 2023 test? Am I correct in saying that each plan only has 1 prior year subgroup, and therefore 3.5% will be used as the prior year average for plan "A", and 4.1% would be used for plan "B"? 

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