Course 5 Testing Part 2 Flashcards
(39 cards)
What is the 6 step process of the ADP Test?
- Determine Current/Prior Year method for NHCE deferrals
- Determine which participants are eligible
- Determine the HCE/NHCE groups
- Calculate each employee’s ADR
- Calculate each group’s ADP
- Determine if the ADP test passes by comparing the HCE ADP with the NHCE ADP
Are catch-up contributions/deferrals included in the ADR?
No
What does the ACP test measure?
Employer matching contributions and after-tax employee contributions
What are the 6 steps in the ACP Test?
- Determine Current/Prior Year method for NHCE deferrals
- Determine which participants are eligible
- Determine the HCE/NHCE groups
- Calculate each employee’s ACR
- Calculate each group’s ACP
- Determine if the ACP test passes by comparing the HCE ACP with the NHCE ACP
What are the 3 correction methods permitted by law to correct a failed ADP or ACP test?
- Shifting ADR deferrals from the ADP test to the ACP test
- Making a QNEC
- Making a corrective distribution
As a general rule, a failure of the ADP or ACP test must be corrected within a _____________.
12-month regulatory correction period
What does CODA stand for?
non-qualified cash or deferred arrangement
Through what system can the employer avoid treatment of the 401(k) arrangement as a nonqualified CODA by correcting the ADP failure after the regulatory correction period has passed?
Employee Plans Compliance Resolution System (EPCRS)
If the violation of the ACP test is not corrected within the 12-month regulatory correction period, then…
the entire plan is disqualified
What is shifting?
is the concept of either taking contributions from the ADP test and moving them to the ACP test or taking contributions from the ACP test and moving them to the ADP test
What are the shifting techniques?
- Counting Qualified Matching Contributions in the ADP test
- Include elective deferrals in the ACP test
When can you count elective deferrals in the ACP test?
The plan must pass the ADP test both before and after the deferrals are shifted
What are the 5 steps for shifting ADP deferrals into the ACP test?
- The ADP test must pass and the ACP test is failing
- Calculate the ADP cushion
- Shift the ADP cushion to the ACP test
- Calculate the new ACRs post-deferral shift
- Rerun the ACP test post shift
What is the ADP cushion?
the amount of excess NHCE deferrals above the minimum passing rate of the test
How do we calculate the ADP cushion?
We take the HCE ADP amount and determine the minimum NHCE ADP to pass the test. To do this, we take our ADP test formula and ‘reverse it’
How to calculate the Minimum ADP:
- Divide and subtract (take the greater value)
- Divide by 1.25
- Compare and take the lesser of the two above values
ADP Cushion =
NHCE ADP - Minimum Passing NHCE ADP
How is a QNEC applied?
May be used to correct either a failed ADP or failed ACP test.
How long does a plan have to correct a failed ADP test when using a QNEC?
they have 12 months following the end of the plan year to correct the ADP or ACP test
If the plan is using the Prior Year method, should we use a QNEC?
No
How does a QNEC get allocated to participants?
is defined in the terms of the plan document. Often will be designed so that QNECs are only allocated to NHCEs
What are the 4 different ways to apply QNEC?
- Pro Rata to all NHCP
- Pro-Rata to employed NHC participants
- Per Capita to all NHC Participants
- Per Capita to employed NHC participants
Correction Period
Required to be made within 12 months after the end of the current year being tested. If a corrective distribution is made after the first 2.5 months, but before the end of the 12 month correction period, the employer will incur a 10% excise tax
There is an extension for plans that have an _______________- where the 2.5 months corrective distribution period is extended to 6 months without incurring the 10% excise tax.
Eligible Automatic Contribution Arrangement
