True or False

Designated Roth contributions are included in the ACP test

False

Roth contributions are elective deferrals so they are part of the ADP test

Is Bart excluded from coverage testing?

• Employer matches on the 1st 3% of compensation
• Match is allocated only to ppts who complete 1000 hrs of service for the plan year
• Match is tested seperately under the 401m part of coverage
• No after-tax employee contributions in the plan
• Bart terminates after 200 hrs of service

Yes, he is excluded under coverage testing under 401m

Why? Because he did not meet the service requirement and worked less than 500 hours

Note:  if he had worked 650 hours before terminating, he would be included due to being over 500 hours - however is not benefiting

How do you calculate a ADR (actual deferral ratio)?

This is determined by dividing the participant's deferral amount by his or her compensation

Name the 3 determinations needed to run the ADP test

1. who are the eligible employees
2. the ADR of each eligible employee
3. current yr eligible employees must be identified regardless of testing method

Who are the eligible employees for the ADP test?

Eligible employees who:

1) are under the 401k arrangement

2) for all or a portion of the plan year

3) doesn't matter if they are making deferrals or not

4) is eligible at any time during the plan year, even if terminated

A plan that includes a 401k arrangement may consist up to these 3 plans for coverage testing

1) 401k - elective deferrals

2) 401m - matching, after tax $,QMEC & safe harbor match

3) non-401k/non-401m - non-elective, QNEC & safe harbor non-elective

True or False

The safe harbor rules excuse the 401k arrangement from both the ADP and coverage test.

FALSE

It does not exclude from coverage.  Coverage test looks at the ratio of benefiting employees to total employees.  Safe harbor has nothing to do with it.

True or False

The ratio percentage test is performed separately for each disaggregated plan based on the benefiting group identified for that plan

True

True or False

When determining the coverage testing group for the 401k plan, the exclusion category for terminated participants who complete 500 or fewer hours does not apply

True

These participants are not excludable employees when testing because termination during the year or failure to complete a given # of hours during the yr does not affect whether the employee is eligible to participate in the 401k plan

True or False

For coverage testing, if an employee makes a one-time election not to participate in the 401k plan at the time he or she is first eligible to participate, they are still considered to be an eligible employee under the 401k plan

False

If they opted out of the plan at the time they are first eligible, they are not considered to be an eligible employee. 

This is also true for nondiscrimination ADP testing

When determining the coverage testing group for the 401m plan, the exclusion for terminated participants who complete 500 or fewer hours of service during the year applies only if:

the 401m plan consists only of employer matching

and

hours of service and/or last day employment conditions apply to recieve the match

Yes or No

If a plan includes after-tax employee contributions, and all the employees who are eligible for the plan may elect to make such contributions, does the terminated participant exclusion apply for coverage testing on a 401m?

If there is no service requirement for an employee to elect deferrals to the after-tax then, No, because it now consists of both after-tax employee contributions and employer match contributions.

Even if the participant didn't meet the service condition for the match, no service requirement applied to the eligible employee's right to elect their after-tax deferral.

True or False

When testing coverage under a 401m plan, the employee is benefiting if he or she is eligible, even if they didn't make the contributions required to receive a match

True

As long as they would have received the employer match contribution had they made it, they are considered benefiting.

This also applies to determine eligible employees for the nondiscrimination ADP test

Part one:  Art is hired on May 1, 2010.  He is eligible to participate in the 401k plan on the semiannual entry date following completion of one year of service.  The plan year is a calendar year.  When is he eligible?

Part two:  He chooses not to participate until January 2012.  When testing the disaggregated 401k plan for coverage in the 2010 plan year, should it include Art in the benefiting group?  How about 2011?

Part one:  Art is eligible on July 1, 2011

Part two:  Art would not be included in the 2010 benefiting group because he was not eligible in 2010.

He would be included in the 2011 benefiting group even though he didn't defer because he was eligible.

True or False

In a 401k plan, an eligible employee is considered benefiting only if allocated employer contributions or forfeitures

FALSE

In a 401k plan, an eligible employee is an employee who is permitted to make elective deferrals at any time during the plan year, regardless of whether the contributions are made and regardless of whether employment is terminated during the plan year.

Suppose a plan provides for employer matching contributions on the first 3% of deferrals under the 401k.  Employer matching only goes to participants who complete at least 1,000 hours of service. 

During the current plan year, Bernard terminated after 550 hours of service. 

1.  Is he included in the 401m coverage testing group?

2.  Is he considered benefiting?

1.  He is included in the 401m coverage testing group because he did not terminate with 500 or fewer hours of service.

2.  He is not benefiting because he needed at least 1,000 hours of service to receive the Employer Matching.

Suppose a plan provides for 50% match on deferrals.  A participant who may make elective deferrals is eligible for the match, even if she terminates during the plan year, regardless of hours of service. 

When testing the disaggregated 401m plan for coverage, will the plan include Arlene in the benefiting group if she is eligible for the match but chooses not to defer so she doesn't receive it?

Yes, she would be included.  A participant is treated as eligible to receive the match even if she doesn't make the contributions required for a match.

Assume a plan has immediate enrollment but requires employment on the last day of the plan year to receive the employer match.  Leah terminates during the plan year with 400 hours of service.  Even if she had made elective deferrals for the plan year, she would not receive the match.

1.  Is she included in the benefiting group when testing coverage for the disaggregated 401k coverage?

2.  Is she included in the benefiting group when testing coverage for the disaggregated 401m coverage?

1.  401k:  Yes, she is eligible and benefiting

2.  401m:  No, she is not benefiting because she is not employed on the last day of the plan year.  Note she is also not included on the 401m coverage test either since she has fewer than 500 hours of service

Suppose a 401k plan requires a participant to complete at least 250 hours of service during a quarter to be eligible for employer match for that quarter.  John completes 150 hours in the first quarter, 225 in the second and 175 hours in the third and 300 in the fourth. 

When performing the coverage test for the 401m plan year, is he treated as benefiting for the year?

YES

Because a 401m plan must test coverage under the annual testing method.  Therefore, his failure to be eligible for the match for some of the allocation periods will not affect his status of benefiting under the plan year being tested.

To determine excludable employees under a dual eligibility provision, the exclusion for employees who fail to satisfy the plan's age/service requirement applies to what?

The lowest age/service requirements to any employee benefiting under the plan for the plan year.

What test must the ADP and ACP of the HCE group satisfy?

Either the 1.25 test or the 2% spread test.

The greater of the two results under these tests set the limit for the ADP & ACP of the HCE group.

1.25 test vs 2% test:

Which one produces the better results?

1.  If the ADP/ACP of the NHCE group is equal to or less than 2%?

2.  If the ADP/ACP of the NHCE group is between 2% & 8%?

3.  If the ADP/ACP of the NHCE group is greater than 8%?

1.  =/< 2%: Double the % to arrive at the limit for HCE

2.  2%-8%:  Add 2% points to determine the limit for HCE

3.  >8%:  the 1.25 test produces better results & sets the limit for HCE

True or False

The ADP or ACP test has to be run using the prior year testing method.

FALSE

ADP & ACP can be run using either the current year or prior year testing.

If the plan fails the ADP or ACP test for a plan year, how long do they have to correct it?

Corrective action must be taken during the 12-month period following the close of the plan year.

What is the difference between the ADP & ACP test?

ADP:  tests nondiscrimination w/ 401k

ACP:  tests nondiscrimination w/ 401m (employer match & after tax employee contributions)

What two plans do not have to perform the ADP test?

SIMPLE 401k & Safe Harbor 401k - these are automatcially

deemed to pass.

What type of plan does not have to pass the ACP test, even if the employer match or employee after tax contributions would have failed the test?

A governmental plan maintained by a state or local government.

If an employee is an HCE in the current plan yr but was an NHCE in the prior plan yr and the plan is testing ADP/ACP in the prior plan yr, how do you calculate the tests?

The employee will be reflected in both the HCE & NHCE groups.

The employee's ADR/ACR for the current yr is included in the ADP/ACP of the HCE group and the ADR/ACR from the prior year is included in calculating the ADP/ACP of the NHCE group.

While the prior year testing method for ADP/ACP is usually preferred, what is a potential drawback?

If the IRS audits the plan, they indicate that it will need to open two plan years for auditing purposes.

True or False

When testing, prior year data could be used to calculate the ADP of the NHCEs, but current year data could be used to calculate the ACP of the NHCEs, or vice versa.

TRUE

When switching from prior yr testing to current yr testing, how long must it stay on current yr testing before it can switch back to prior yr?

5 yrs

What 3 determinations must be made to run the ADP test? 

1.  Eligible employees (401k)

2.  ADR

3.  Current yr eligible employees must be identified regardless of testing method (current or previous)

True or False

Employees making a one-time, irrevocable election not to defer is not treated as an eligible employee under the 401k plan, is excluded from the ADP/ACP test and is also treated as not benefiting under the plan for coverage testing purposes.

TRUE

This rule only applies if the employee makes the election upon employment or the first day they are eligible in the plan. 

Name the two types of post-severance payments that are allowed to be included in compensation by definition of section 415 and may be eligible for deferral

1.  certain compensation payments made within 2 1/2 months after the severance from employment date (payroll periods and bonuses paid after severance date-not severance pckgs)

2.  certain compensation payments made to a former employee who is performing military services or is disabled

If a plan permits the terminated employee to defer from the final paycheck and it crosses a plan year, would the plan include this terminated employee as an eligible employee for such plan year for ADP purposes?

YES

Even though it seems odd to include a terminated participant in a prior plan year, the IRS clearly adopts the position that the eligibility to defer out of post-severance compensation results in treatment as an eligible employee for ADP testing purposes.

True or False

A limited participant is considered an eligible employee under a 401k plan.

FALSE

(pre-participation rollovers)

Employees must satisfy eligibility requirements to participate in the 401k for ADP purposes

If an employee is eligible but does not receive any compensation for the plan year in which they are eligible, are they considered eligible for the 401k?

NO

Unless the compensation earned for a year is paid w/in the first few weeks of the next yr (first few weeks rule).  I.e. comp paid in the last week of December is paid in January, it can be counted for the plan yr of hire.

How do you calculate an employee's ADR?

An employee's ADR is their deferral (QMAC & QNEC - no catch-up!) amount divided by the employee's IRC 414s compensation.

The ADR for each eligible employee must be calculated before the ADPs of the HCE & NHCE groups can be determined.

How are excess deferrals under IRC 401(a)(30) for purposes of ADR? 

NHCE's:  excess deferrals are excluded from ADR

HCE's:  excess deferrals are included in ADR

This is true regardless if a corrective distribution was made timely

An HCE defers $17,500 during the 2010 calendar plan yr.  His compensation is $100,000. The IRC 401(a)(30) limit for 2010 is $16,500 so a corrective distribution was made for $1,000 before April 15,2011. 

Calculate his ADR

$17,500/$10,000 = 17.5%

The excess deferrals are included for HCE's only, even if corrective distributed timely.  Unless the excess can be reclassified as catch-up contributions.

Special timing rule

 (Remember 2 1/2 months)

March 15th on calendar plan years

If the deferral amount relates to services performed in the current plan year (and service related bonuses), it can be treated as deferred (ADR) for that year as long as it has been received within 2 1/2 months after the close of the plan yr.

Example 2-38

Jane is a 50 yr old participant in a calendar yr plan that allows for catch-up.  Her annual comp is $200,000 and she defers $16,400.  The first 3% of comp is matched and the employer also makes a 15% comp non-elective contribution.

1) Has she exceeded the IRC 415(c) limit? If so, by how much?

2) What is her ADR?

1)  Yes by $3,400

Elective Deferral:  $16,400

Employer Match:   $ 6,000

ER Non-elective:  $30,000

TOTAL:              $52,400 -> IRC 415c limit = $49,000

But! She can reclassify $3,400 as catch-up

2) Her ADR then would be 6.5% ($16,400 - $3,400 = $13,000.  $13,000/$200,000 = 6.5%)

Example 2-39

A calendar plan yr 401k limits elective deferrals to 10% of compensation but allows for catch-up.  John, age 50, has an annual comp of $90,000 but defers $13,000.

What is his ADR?

$90,000 x 10% = $9,000

He deferred $13,000 so he his over by $4,000

But - the $4,000 is reclassified as catch-up

$9,000/$90,000 = 10%

If an individual limit under IRC 402(g) is exceeded due to another elective deferral arrangement with an unrelated employer, is it treated by the 401k plan as an excess deferral for ADP testing purposes?

NO

True or False

Elective deferrals that are shifted to the ACP are disregarded when computing an employee's ADR.

TRUE

True or False

Elective deferrals made by a re-employed participant under USERRA (Uniformed Service Employees Re-employment Rights Act) are calculated in the ADR of the participant for the plan year in which made and for any other plan year.

FALSE

The make-up deferrals are not counted for the plan year that includes the military service period to which they relate nor to the plan year in which they are actually contributed.

John's gross compensation is $50,000 and he defers $3,000 to the 401k.  He also defers $1,000 for health insurance benefits under a cafeteria plan. 

Calculate his gross and net ADR

Gross:  $3,000/$50,000 = 6%

Net:  $3,000/$46,000 = 6.52%

$50,000 - $4,000 ($3,000 401k + $1,000 health ins) = $46,000.   

A 401k plan has a plan year ending December 31st.  For the 2010 plan year, Suzy's compensation is $260,000 and she defers $14,000 for the plan year.  The compensation dollar limit for 2010 is $245,000. 

Calculate her gross & net ADR

Gross:  $14,000/$245,000 = 5.71%

Net:  $14,000/$245,000 = 5.71%

If net compensation is used, we start with the participant's net compensation of $246,000 (ie. $260,000 comp - $14,000 deferrals) then cap it at $245,000

What two determinations must be made to run the ACP test?

1.  Eligible employees

2.  Contribution ratios (ACR)

How do you calculate the ACR?

Divide the participant's contribution amount (attributable to employer matching contributions and after-tax employee contributions) by the participant's compensation.

True or False

A participant who is an eligible employee under the 401k and included on the ADP test must be an eligible employee under the 401m and included on the ACP test.

FALSE

The plan could have a minimum hours-of-service or employment on the last day of year provision to receive a match thus they may not meet the eligibility requirements under the 401m and excluded from ACP.

True or False

An employee who receives no compensation for the plan year is probably not considered to be an eligible employee under the plan's 401m arrangement, even though the individual technically satisfies the plan's definition of an eligible employee.

TRUE

True or False

The individual actual contribution ratio (ACRs) for each eligible employee must be calculated before the ACPs for the HCE and NHCE groups can be determined.

TRUE

(ACR Exclusion) If a plan allows for catch-up and the company matches the catch-up, these employer matching contributions are included as part of the participant's contribution amount, with what exceptions?

1.  QMACs that were treated as deferral on the ADP

 2.  Employer matching contributions with respect to make-up elective deferrals or after-tax made with respect to USERRA-covered military service

3.  Employer matching contributions forfeited in relation to excess contributions or excess deferrals

4.  Employer match recharacterized as catch-up contributions

*QNECs are included in the ACR

There is an additional condition on the inclusion in the ACP test of employer matching contributions allocated to NHCEs.  Under this rule, employer matching contributions would be disregarded from teh ACP test to the extent that they exceed the greatest of what 3 items?

1.  5% of IRC 414 compensation

2.  100% of the participant's elective deferrals for a year

3.  twice the plan's representative matching rate

The plan's representative matching rate is the greater of:

1.  the lowest NHCE matching rate, taking into account a sampling of eligible NHCEs that equal at least 50% of the total eligible NHCEs

or

2.  the lowest NHCE matching rate of any eligible NHCE who is employed by the employer as of the last day of the plan year.

The plan's matching formula is 100% on the first 3% deferred and 25% of the next 3%.  Sam's compensation for the year is $20,000 and he is at a 6% deferral rate. 

What is his matching rate?

$20,000 x 3% = $600

$20,000 x 3% = $600 x 25% = $150

$600 + $150 = $750

Matching rate = $750/$1200 = 62.5%

($20,000 x 6% = $1,200)

How do you calculate the match rate?

Total amount of employer matching contributions for a participant divided by the participant's elective deferrals.

Based on the following information, determine the HCE ADP:

• None of the HCEs are catch-up eligible
• There are no other contributions in the plan
• There is no plan-imposted limit on elective deferrals

HCE             2010 Compensation             2010 Elective deferrals

A                         $20,000                          $10,000    

  B                         $80,000                           $2,400