Course 4 Testing Part 1 Flashcards
(23 cards)
What is the ADP test?
The actual deferral percentage is the exclusive means of showing that deferrals to the 401k arrangements satisfy the nondiscrimination requirements of the IRC 401a4.
What is the ACP test?
The actual deferral percentage is the exclusive means of showing that contributions to the 410m arrangements satisfy the nondiscrimination requirements of the IRC 401a4.
When do plans automatically satisfy the nondiscrimination requirements?
Plans automatically satisfy the nondiscrimination requirements if the plan consists of only NHCE’s, if the plan consists of only HCE’s, and if the plan is designed as a 401k Safe Harbor Plan.
What are the steps to calculate the ADP test?
- Determine whether current or prior year data is used to calculate the ADR of the NHCEs. 2. Determine which participants are eligible and included in the test. 3. Determine which employees comprise the HCE and NHCE groups. 4. Calculate each employee’s actual deferral ratio. 5. Calculate the ADP of the individual ADR’s for each group. 6. Compare the HCE ADP to the NHCE ADP.
What is the formula for Average Deferral Rate?
ADR = deferrals / compensation.
How is the ADP of the actual deferral ratios calculated?
ADP = sum(ADR’s) / #HCE members.
What is the maximum HCE ADP needed to pass?
Calculate the lesser of NHCE Group ADP x 2 or NHCE group ADP + 2, and calculate NHCE Group ADP x 1.25. Compare the two to find the greater value.
Where can you find the testing method?
The adoption agreement.
What data is used when the prior year data election is made?
Compensation, deferrals, and eligibility for the prior year’s plan for NHCE’s only. The current year data is always used for HCE’s.
Which employees are used when running ADP tests?
Benefiting employees. Catch up and corrective distributions are excluded. Compensation is limited by 401a17 maximum.
What must be checked if the plan uses otherwise excludable for coverage?
ADP testing must use otherwise excludable disaggregation and vice versa. You must check the plan document to make sure you’re allowed to do that.
How many tests are run under the otherwise excludable disaggregation?
2.
What is the early participation test?
Another disaggregated testing method available only for ADP/ACP testing.
Why use the early participation test?
To incentivize employers to offer 401k plans to more employees without negatively affecting the ADP/ACP results. It makes the test simpler to perform.
What are the steps for the early participation test?
- Check if prior year or current year testing method is used. 2. Determine which employees have satisfied the statutory eligibility. 3. Calculate the ADR for HCE’s and NHCE’s. 4. Calculate ADP for NHCE’s. 5. Calculate the lesser of NHCE ADP x 2 or NHCE ADP + 2. 6. Calculate NHCE ADP x 1.25. 7. Compare the two to find the greater value.
How can the testing methods be changed from prior year to current year?
The plan can be amended to use the current year, but would then be required to use the current year method for 5 years.
When must a plan amendment be adopted to change testing methods?
The amendment must be adopted by the last day of the plan year being tested.
How can a plan change from current year to prior year testing method?
Current year method plans can only be changed to prior year method if they have been the current year for each of the last 5 plan years.
What are the exceptions to the 5 current year rule?
- Plans that have been in existence for less than 5 years and have used the current year method every year. 2. Safe harbor and SIMPLE 401k plan years are current year (even though they aren’t tested). 3. If different plans are being aggregated for testing purposes, then each plan must have used the current year method for each of the last 5 plan years in order to switch. 4. Plans that go through a business transaction may be allowed to switch.
What are reasons to use the otherwise excludable employees testing method?
- For employees who do not meet statutory eligibility and have 0% or low deferral rates. 2. If the plan has a significant portion of participants that do not meet statutory eligibility requirements.
What are reasons to use the early participant testing method?
- If the HCE’s have 0% or low deferral rates that also do not meet statutory eligibility requirements. 2. If the plan’s HCE’s have high deferral rates that also do not meet statutory eligibility requirements (either testing method would work then). 3. If the plan has a high percentage of NHCE’s that meet statutory eligibility and have high deferral rates.
How to correct a failed ADP test?
- Amend to include more NHCE. 2. HCE’s take corrective distributions - excess contribution or excess aggregate contributions for ACP. 3. The employer can make additional contributions of QNEC and QMAC.
What is QMAC?
Based on the deferrals.
