401(k) plan testing 201media01.commpartners.com/nipa/2017/session16/1s_401k...•simple 401(k) plans...

401(k) Plan Testing 201

Kimberly B. Martin, APA, CPC, QPA

NIPA, Education Director

Bates & Company, Inc., Account Executive

Kimberly B. Martin, APA, CPC, QPANIPA, Education DirectorBates & Company, Inc., Account Executive

As the Education Director of NIPA, Kim Martin is

responsible for the leadership and strategic management of

the association’s educational programs. Kim is also an

account executive at Bates & Company, Inc., providing

administration and consulting services to clients.

Agenda

Whether the ADP/ACP test is performed correctly

Alternative testing strategies that may improve test results

Corrective action that must be taken to fix a failed ADP/ACP test

Special 401(k) Tests

• 401(k) arrangement = ADP Test

• 401(m) arrangement = ACP TestNondiscrimination

Tests

• Safe harbor 401(k) plans

• QACAs

• SIMPLE 401(k) plans

• Only HCEs (or only NHCEs)

Automatic Pass

Failed ADP Test

Participant Compensation Deferrals ADP

Amy (HCE) $250,000 $15,000 6.00%

Bill (HCE) $150,000 $10,500 7.00%

Carl (HCE) $130,000 $6,500 5.00%

HCE ADP 6.00%

Dee (NHCE) $70,000 $4,900 7.00%

Elli (NHCE) $40,000 $0 0.00%

Fred (NHCE) $10,000 $0 0.00%

NHCE ADP 2.33%

1.25 2.91%

Fail 2x or 2+ 4.33%

Test performed correctly?

Apply testing

strategies

Take corrective

action

Failed ADP Test

Identify eligible employees

Classify HCEs and NHCEs

Calculate each participant's ADR

Determine the HCE ADP and the NHCE ADP

Perform the numerical ADP test

Performing the ADP Test

ADP Test Performed Correctly?

Correct employees included?

Correct HCEs/NHCEs

identified?

Correct contributions

tested?

Correct compensation

used?

Correct testing method applied?

Correct testing calculations

used?

Correct Employees Included?

• Eligible employees

• An eligible employee is any employee who is eligible to make

elective deferrals under the plan for all or a portion of the plan

year

• Employees who make a one-time, irrevocable election not to

participate in the plan, are not eligible employees

Correct HCEs/NHCEs Identified?

• A highly compensated employee (HCE) is defined as an

employee who

• Owns more than 5% of the employer at any time during the

current or preceding plan year, or

• For the preceding (“look-back”) year,

• Received compensation greater than $120,000 (in 2017), and

• If elected by the employer in the document, was a member of the

top-paid group (i.e., was among the top 20% of employees, ranked

based on compensation)

• A non-highly compensated employee (NHCE) is any

employee who is not considered to be an HCE

HCE Ownership Test

• Related employers

• Own more than 5% of a related employer?

• No aggregation of ownership

• Example: ABC Co. and DEF Co. are related

Owner ABC Co. DEF Co.5%

Owner?

G 4% 2% No

H 1% 7% Yes

Attribution under IRC §318

• Family attribution

• Between spouses

• From parent to child (including adopted)

• From child to parent

• From grandchild to grandparent

• Not from grandparent to grandchild

• No double attribution

• No sibling attribution

Example – Family Attribution

100% Owner’s: Attribution Applies?

Spouse Yes

20-year old daughter Yes

35-year old son Yes

Son’s wife No

Son’s 15-year old daughter No

Mom Yes

Grandpa Yes

Brother No

Attribution under IRC §318

• Additional attribution from

• Partnerships, estates, trusts, and corporations

• In proportion to the interest or ownership

• Example:

• Individual owns 50% of Partnership P

• P owns 50% of Corporation C

• Individual is attributed to own 25% of C

• Corporations – 5% or more ownership is required

• Stock option

• Treated as owning stock, even if option not yet exercised

HCE Compensation Test

• Related employers – aggregation of compensation

• Example: ABC Co. and DEF Co. are related

Employee J Compensation

ABC Co. $ 50,000

DEF Co. $100,000

Aggregated Compensation $150,000

Individual ADR = de

• Contributions included:

• Elective deferrals

• Designated Roth

contributions

• Excess deferrals of

HCEs

• QNECs/QMACs used to

pass ADP test

ferrals ÷ compensation

• Contributions excluded:

• Catch-up contributions

• Excess deferrals of

NHCEs

• EACA permissible

withdrawals

• Corrective distributions

of excess annual

additions

Correct Contributions Tested?

Correct Compensation Used?

• Individual ADR = deferrals ÷ compensation

• Compensation

• IRC §414(s) compensation must be used for calculating ADRs

• The definition will be specified in the plan document

Correct Testing Method Applied?

• The testing method is defined in the plan document

• Prior year testing method

• NHCE ADR – calculated based on deferrals and compensation in

the year prior to the year for which the testing is being performed

• HCE ADR – calculated based on elective deferrals and

compensation during the testing year

• Allows employers to proactively limit HCE deferrals to a level that

will pass the ADP test

• Current year testing method

• Both NHCE ADR and HCE ADR – calculated based on deferrals

and compensation during the testing year

Example –Which Year’s Data is Used?

• 2017 Calendar Year 401(k) Plan

Testing

Method

HCEs

2017 ADR

NHCEs

2017 ADR

NHCEs

2016 ADR

Current Year

Prior Year

Correct Calculations?

• ADP of the NHCEs

• Average of the NHCE ADRs

• ADP of the HCEs

• Average of the HCE ADRs

• Include eligible employees who do not defer

Example:

• NHCE #1 ADR = 0%

• NHCE #2 ADR = 6%

• Average = (0% + 6%) ÷ 2 NHCEs = 3%

• NHCE ADP = 3%


• The ADP of the eligible HCEs cannot exceed the greater

of:

• 1.25 times the ADP of the eligible NHCEs, or

• The lesser of:

• 2 times the ADP of the eligible NHCEs, or

• 2 plus the ADP of the eligible NHCEs

ADP of NHCEs Applicable Test

Up to 2% 2x

2% to 8% 2+

8% or more 1.25

Failed ADP Test


Amy (HCE) $250,000 $15,000 6.00%

Bill (HCE) $150,000 $10,500 7.00%

Carl (HCE) $130,000 $6,500 5.00%

HCE ADP 6.00%

Dee (NHCE) $70,000 $4,900 7.00%

Elli (NHCE) $40,000 $800 2.00%

Fred (NHCE) $10,000 $0 0.00%

NHCE ADP 3.00%

1.25 3.75%

Fail 2x or 2+ 5.00%

Apply Testing Strategies

• Otherwise excludable employee testing

• Alternative definition of compensation

• Amendment

• Change in testing method

• Change in HCE definition

Otherwise Excludable Employees

• Available to plans that allow employees to become

participants sooner than the statutory one year of

service/age 21 eligibility requirements

• Such plans may be treated as comprising separate plans

for ADP testing (“permissive disaggregation”):

Statutory YOS/Age Lesser

YOS/Age


• Eligible Employees

• Otherwise excludable employees “plan”

• Employees who have attained the plan’s lower age/service

requirements but not age 21 and one year of service

• Statutory employees “plan”

• Employees who have attained age 21 and one year of service

401(k) Plan

ADP Test Statutory

Employees

ADP Test Otherwise Excludable

Example –Otherwise Excludable Employees

• KLM Company 401(k) Plan – 3-month eligibility

YOS? Compensation Deferral ADR

HCE 1 Yes $225,000 $18,000 8.00%

HCE ADP 8.00%

NHCE 1 Yes $ 75,000 $ 3,750 5.00%

NHCE 2 Yes $ 40,000 $ 2,800 7.00%

NHCE 3 No $ 25,000 $ 0 0.00%

NHCE 4 No $ 20,000 $ 600 3.00%

NHCE 5 No $ 15,000 $ 0 0.00%

NHCE ADP 3.00%

1.25 3.75%

FAIL 2x or 2+ 5.00%


• Plan 1 – Statutory Employees


HCE 1 Yes $225,000 $18,000 8.00%

HCE ADP 8.00%

NHCE 1 Yes $ 75,000 $ 3,750 5.00%

NHCE 2 Yes $ 40,000 $ 2,800 7.00%

NHCE ADP 6.00%

1.25 7.50%

PASS 2x or 2+ 8.00%


• Plan 2 – Otherwise Excludable Employees


– – – HCE ADP 0.00%

NHCE 3 No $ 25,000 $ 0 0.00%

NHCE 4 No $ 20,000 $600 3.00%

NHCE 5 No $ 15,000 $ 0 0.00%

NHCE ADP 1.00%

1.25 1.25%

2x or 2+ 2.00%

NO HCEs → AUTOMATIC PASS!!

Consequences of Disaggregation

• Relationship of the nondiscrimination rules to IRC

§410(b) minimum coverage rules

• Requirements designed to work together

• Nondiscrimination rules use the definition of “plan” used for

coverage and visa versa

• After application of disaggregation

Coverage “Plan”

Nondiscrimination “Plan”

401(k) Plan

Statutory Employees

Coverage Test

ADP Test


Coverage Test

ADP Test

Each “plan” must pass the ADP test and the

minimum coverage test


Early Participation Rule

• Alternative permissive aggregation – single ADP test

• Eligible Employees

• Employees who have attained age 21 and one year of service,

and

• HCEs who have satisfied the plan’s lower age/service

requirements but not age 21 or one year of service

• Does not apply to the

minimum coverage test 401(k) Plan

ADP Test Statutory EEs + HCE Otherwise

Excludable

No ADP Test NHCE

Otherwise Excludable

Early Participation Rule:Single ADP Test

401(k) Plan

Statutory Employees

Coverage Test

ADP test


ADP Test (Statutory + HCE Otherwise Excl)

Coverage Test

Example – Early Participation Rule

• KLM Company 401(k) Plan – 3-month eligibility


HCE 1 Yes $225,000 $18,000 8.00%

HCE 2 No $ 50,000 $ 3,000 6.00%

HCE ADP 7.00%

NHCE 1 Yes $ 75,000 $ 3,750 5.00%

NHCE 2 Yes $ 40,000 $ 2,800 7.00%

NHCE 3 No $ 25,000 $ 0 0.00%

NHCE 4 No $ 20,000 $ 600 3.00%

NHCE 5 No $ 15,000 $ 0 0.00%

NHCE ADP 3.00%

1.25 4.75%

FAIL 2x or 2+ 5.00%

Example – Early Participation Rule

• NHCEs 3, 4 & 5 are otherwise excludable employees → not tested


HCE 1 Yes $225,000 $18,000 8.00%

HCE 2 No $ 50,000 $ 3,000 6.00%

HCE ADP 7.00%

NHCE 1 Yes $ 75,000 $ 3,750 5.00%

NHCE 2 Yes $ 40,000 $ 2,800 7.00%

NHCE ADP 6.00%

1.25 7.50%

PASS 2x or 2+ 8.00%

Permissive Disaggregation

Optional

• It’s an elective disaggregation rule, notmandatory

Operational

• Written election is not required

• Decision made on a year-by-year basis

Permissive Disaggregation

• Impact of prior year testing method

• Year-to-year election could trigger a plan coverage change

• Special weighted-average calculation of prior year NHCE %

• Disaggregation

2015

• None

2016

• Disaggregation

2017

Alternative Definition of Compensation

• Compensation used for ADP testing must satisfy the

nondiscriminatory definition of compensation under

IRC §414(s)

• “Safe harbor” definitions are deemed to satisfy §414(s)

• Other compensation definitions must be reasonable and satisfy

the compensation ratio test

• The document may provide a specific definition or permit

any definition allowed under §414(s)• Different definitions of 414(s) compensation may be used each

year


• 414(s) safe harbor definitions

• 415 compensation

• General definition

• Simplified definition

• W-2 compensation

• §3401 compensation

• 415 compensation excluding all elective deferrals

• 415 compensation excluding all “fringe benefits”

• 415 compensation excluding all elective deferrals and all “fringe

benefits”

• Any modification to a safe harbor that affects only HCEs


• 415 compensation excluding all elective deferrals

• Example:

• 415 compensation = $50,000

• 401(k) plan deferrals = $4,000

• Cafeteria plan deferrals = $1,000

• ADR with total compensation = $4,000 ÷ $50,000 = 8.00%

• ADR with “net” compensation = $4,000 ÷ $45,000 = 8.89%

• Consistent definition must be used in prior year testing

Example – Alternative Definition of Compensation

• 2017 calendar year plan using W-2 wages

* Limited to $270,000 under IRC §401(a)(17)

W-2 Wages Deferral ADR

HCE 1 $300,000* $18,000 6.67%

HCE ADP 6.67%

NHCE 1 $ 50,000 $ 4,500 9.00%

NHCE 2 $ 30,000 $ 0 0.00%

NHCE ADP 4.50%

1.25 5.63%

FAIL 2x or 2+ 6.50%

Example – Alternative Definition of Compensation

• ADP test using net compensation (assumes only 401(k) deferrals)

* $300,000 - $18,000 = $282,000, limited to $270,000 under IRC §401(a)(17)

Net

CompensationDeferral ADR

HCE 1 $300,000* $18,000 6.67%

HCE ADP 6.67%

NHCE 1 $ 45,500 $ 4,500 9.89%

NHCE 2 $ 30,000 $ 0 0.00%

NHCE ADP 4.95%

1.25 6.19%

PASS 2x or 2+ 6.95%


• Measurement year

• Plan year or period of eligibility for new participants

• Example: Calendar year plan

• Participant’s entry date = October 1st

• Elective deferrals = $250

• Plan year compensation = $20,000

ADR = $250 ÷ $20,000 = 1.25%

• Compensation from entry date = $5,000

ADR = $250 ÷ $5,000 = 5.00%

• Net compensation from entry date = $4,750

ADR = $250 ÷ $4,750 = 5.26%

Switch Testing Methods

• Prior year testing → current year testing

• Allowed without prior IRS approval

• Current year testing → prior year testing

• Not allowed unless the plan has used the current year testing

method for the lesser of:

• 5 years, or

• The number of years the plan has been in existence

• A plan amendment is required to switch testing methods

• Timing – by the last day of the plan year in which the amendment

is effective

Change Definition of HCEs

• Optional HCE elections

• Lookback year

• Use calendar year beginning in the 12-month period

preceding the current plan year

• Top paid group

• Employees with compensation greater than the dollar limit

and part of “top paid group”

• Top 20% of employees ranked in order of descending

compensation for the lookback year

• A plan amendment is required to change elections

• Timing – by the end of the plan year; ideally before the beginning

of the plan year

Correcting ADP Test Failures

• Options:

• Distribute excess contributions

• Recharacterize excess contributions as

• Catch-up contributions

• After-tax employee contributions

• Make QNECs/QMACs

• Timing – within 12 months after the end of the plan year

Corrective Distributions

• Excess contribution amount

• Calculated using the leveling method:

• Step 1 – Determine the total dollar amount to be refunded

• Step 2 – Allocate the total refund among HCEs

Failed ADP Test


Amy (HCE) $250,000 $15,000 6.00%

Bill (HCE) $150,000 $10,500 7.00%

Carl (HCE) $130,000 $6,500 5.00%

HCE ADP 6.00%

Dee (NHCE) $70,000 $4,900 7.00%

Elli (NHCE) $40,000 $800 2.00%

Fred (NHCE) $10,000 $0 0.00%

NHCE ADP 3.00%

1.25 3.75%

Fail 2x or 2+ 5.00%


• Step 1 – Determine the total amount of excess

contributions to correct the failed ADP test• The ADR of the HCE with the highest ADR is reduced by the

amount required to bring that HCE’s ADR down to the next highest

HCE’s ADR

• This step is repeated until the total ADP of the HCEs is reduced to

the highest permitted ADP under the plan

• This process determines the total amount of the excess

contributions that must be distributed, but does not identify the

HCEs who will receive the refund

Example – Corrective Distributions

• Step 1 – Determine the total amount of excess

contributions to correct the failed ADP test

Participant Comp Deferral ADR1st

Adjust

Adjust

ADR

2nd

Adjust

Adjust

ADR

Excess

Amount

Amy (HCE) $250,000 $15,000 6% 6%

$250,000

x 1% =

$2,500

5% $2,500

Bill (HCE) $150,000 $10,500 7%

$150,000

x 1% =

$1,500

6%

$150,000

x 1% =

$1,500

5% $3,000

Carl (HCE) $130,000 $6,500 5% 5% 5% $0

Total 6% 5.67% 5% $5,500


• Step 2: Allocate the total amount of excess contributions

among the HCEs with the highest deferral amount• The deferral of the HCE with the highest deferral amount is

reduced to the amount required to bring that HCE’s deferral

amount down to the next highest HCE’s deferral amount

• This step is repeated until the total amount of excess

contributions that must be distributed (from step 1) has been

allocated

• Step 2: Allocate the total amount of excess contributions

among the HCEs with the highest deferral amount

Participant Comp Deferral Adjusted Deferral AmountApportioned

Excess

Amy (HCE) $250,000 $15,000Amount after 1st adjustment = $10,500

Amount after 2nd adjustment = $10,000$5,000

Bill (HCE) $150,000 $10,500Amount after 1st adjustment = $10,500

Amount after 2nd adjustment = $10,000$500

Carl (HCE) $130,000 $6,500 No adjustments $0

Example – Corrective Distributions


• Must include attributable earnings

• Any reasonable method can be used if it (i) does not violate

IRC §401(a)(4), (ii) is used consistently for all participants and all

corrective distributions under the plan, and (iii) is used to allocate

income to participant’s accounts

• The following alternative formula is specified in the regulations

• Requirement applies to plan year earnings

Earnings attributable to elective

deferrals for the plan year x

Excess contributions for the plan year

Balance attributable to elective deferrals


Taxation

Taxed in year of

distribution

Not subject to 10% early distribution

tax

Voluntary10% tax

withholding


Timing

* The 2½ month time frame is extended to 6 months

for EACAs (6/30/2017 for 2016 calendar plan years)

Plan Year Tested: 12/31/2016

Statutory correction period

(12 months)1/01/2017 to 12/31/2017

If correction occurs by

3/15/2017*No further action required

If correction occurs after

3/15/2017* but on or before

12/31/2017

Employer is required to file a

Form 5330 and pay a 10%

excise tax on the excess


12/31/2017May use EPCRS to correct


• Administrative matters

• Source/ordering of distributions

• Forfeit related match

• No spousal consent required

• Not eligible for rollover

• Report on Form 1099-R

• Fail ADP after total distribution

Recharacterize Excess Contributions

• As catch-ups

• Must be 50 or older by the end of the calendar year

• Deferrals are classified as catch-up contribution when

• Plan limit is exceeded, or

• Statutory limit is exceeded (§402(g), §415, ADP test)

• Optional provision; document will state if permitted

• 2017 catch-up limit = $6,000

Example:

• Amy (age 52):

$5,000 excess contribution → catch-up

• Bill (age 44):

$500 excess contribution → distributed

Recharacterize Excess Contributions

• As after-tax employee contributions

• Optional provision; document will state if permitted

• Must include in the ACP test

• Not commonly used as a correction method

QNECs/QMACs

• Contributions to NHCEs to increase ADRs

• Must be 100% vested

• Subject to elective deferral withdrawal restrictions

• Contribution formula/allocation conditions specified in document

• Targeted or uniform percentage/dollar amount

• Minimum hours/last day requirement options

• Example:NHCE Comp Deferral

1%

QNEC

Total

Contrib

Adjusted

ADR

Dee $70,000 $4,900 $700 $5,600 8%

Elli $40,000 $800 $400 $1,200 3%

Fred $10,000 $0 $100 $100 1%

Total $1,200NHCE

ADP4%

QNECs/QMACs

• Must be made by the end of the 12-month period

following the plan year

• Problematic with prior year testing

• May be funded by forfeitures, if allowed in document

• Cannot be used in both the ADP and ACP tests

• QMAC shifting option

• Portion of QMAC not needed to pass the ACP can be shifted to

NHCEs ADR for ADP testing purposes

Shifting QMAC to ADP Test

• Requirements

• Shifted QMAC cannot be included in the ACP test

• Cannot shift a QMAC if it would be excluded from ACP test

because it is disproportionate

• QMAC must be deposited within 12 months of the end of the plan

year

• Uniform testing method for ADP and ACP test

Example – Shifting: QMAC to ADP Test

HCE NHCE

ADP – fail 8.00% 5.00%

ACP* – pass 3.00% 2.50%

HCE NHCE

ADP – pass 8.00% 6.00%

ACP* – pass 3.00% 1.50%

Shift 1% of QMAC in ACP to ADP

* Assume only match are QMACs

EPCRS –Correction After 12-Month Period

Timing

Plan Year Tested: 12/31/2016

Statutory correction period

(12 months)1/01/2017 to 12/31/2017

If correction occurs between

1/01/2018 and 12/31/2019

May use SCP or VCP to correct

mistakes determined to be

insignificant or significant


12/31/2019

• May only use SCP to correct

mistakes determined to be

insignificant

• May use VCP to correct both

insignificant and significant

mistakes

EPCRS Correction Options

• Method 1 – Increase ADP of NHCEs so test passes

• Requires a QNEC to all eligible NHCEs

• Same percentage for each NHCE

• Method 2 – One-to-one method

• Corrective distribution of excess contributions (and earnings), and

• QNEC of that same dollar amount allocated to all eligible NHCEs

• Example:

Method 1 – Increase ADP of NHCEs

• 1% QNEC of $1,200 allocated to Dee, Elli and Fred

Method 2 – One-to-One Method

• $500 (plus earnings) corrective distribution to Bill, and

• $500 (plus earnings) QNEC allocated to Dee, Elli and Fred

or

Participant Compensation Match ACP

Amy (HCE) $250,000 $3,750 1.50%

Bill (HCE) $150,000 $2,250 1.50%

Carl (HCE) $130,000 $1,950 1.50%

HCE ACP 1.50%

Dee (NHCE) $70,000 $1,050 1.50%

Elli (NHCE) $40,000 $0 0.00%

Fred (NHCE) $10,000 $0 0.00%

NHCE ACP 0.50%

1.25 0.63%

Fail 2x or 2+ 1.00%

Failed ACP Test

Test performed correctly?

Apply testing

strategies

Take corrective

action

Failed ACP Test

Identify eligible employees.

Classify HCEs and NHCEs.

Calculate each participant's ACR.

Determine the HCE ACP and the NHCE ACP.

Perform the numerical ACP test.

Performing the ACP Test

Correct Employees Included?


• Eligible to make after-tax employee contributions

• Eligible to receive matching contributions

• Satisfy allocation conditions (hours/last day)

• Example: Last day employment required for match

• Active participant who deferred/didn’t defer = included in

the ACP test

• Terminated participant who deferred/didn’t defer = not

included in the ACP test

Correct HCEs/NHCEs Identified?

See ADP test discussion

Individual ACR = contri

• Contributions included:

• Matching contributions

• Forfeitures allocated as

a match

• QNECs/QMACs not

used to pass ADP test

• After-tax employee

contributions

butions ÷ compensation

• Contributions excluded:

• Forfeited matching

contributions attributed

to excess contributions

• NHCE disproportionate

matching contributions

• Rollover contributions

• Loan repayments

Correct Contributions Tested?

Correct Compensation Used?


Correct Testing Method Applied?


Note: The ACP testing method is not required

to be the same as the ADP testing method


• ACP of the NHCEs

• Average of NHCE ACRs

• ACP of the HCEs

• Average of HCE ACRs

• Include employees eligible to receive the match but

who don’t

Example:

• NHCE #1 ACR = 0%

• NHCE #2 ACR = 3%

• Average = (0% + 3%) ÷ 2 NHCEs = 1.50%

• NHCE ACP = 1.50%


• The ACP of the eligible HCEs cannot exceed the greater

of:

• 1.25 times the ACP of the eligible NHCEs, or

• The lesser of:

• 2 times the ACP of the eligible NHCEs, or

• 2 plus the ACP of the eligible NHCEs

ACP of NHCEs Applicable Test

Up to 2% 2x

2% to 8% 2+

8% or more 1.25

Participant Compensation Match ACP

Amy (HCE) $250,000 $3,750 1.50%

Bill (HCE) $150,000 $2,250 1.50%

Carl (HCE) $130,000 $1,950 1.50%

HCE ACP 1.50%

Dee (NHCE) $70,000 $1,050 1.50%

Elli (NHCE) $40,000 $400 1.00%

Fred (NHCE) $10,000 $0 0.00%

NHCE ACP 0.83%

1.25 1.04%

Pass 2x or 2+ 1.66%

Passing ACP Test

Applying Testing Strategies

• Otherwise excludable employee testing

• Alternative definition of compensation

• Amendment

• Change in testing method

• Change in HCE definition

• Same methodology as for the ADP test

Correcting ACP Test Failures

• Options

• Distribute excess aggregate contributions

• Make QNECs/QMACs

• Shift deferrals from ADP test to ACP test

• Timing – within 12 months after the end of the plan year


• Calculation of excess aggregate contribution

• Use 2-step leveling method (see ADP test correction)

• Partially vested match

• Distribute vested portion of excess

• Forfeit non-vested portion of excess

• Must include attributable earnings

• Timing – 12-month period, 2½ month “deadline”

• Taxed in year distributed, report on Form 1099-R

• No spousal consent required, no rollovers

QNECs/QMACs

• Contributions to NHCEs to increase ACRs

• Must be 100% vested

• Subject to elective deferral withdrawal restrictions

• Contribution formula/allocation conditions specified in document

• Targeted or uniform percentage/dollar amount

• Minimum hours/last day requirement options

• Timing – 12-month period following the plan year

• May be funded by forfeitures, if allowed in the document

• Cannot be used in both the ADP and ACP tests

Shifting Elective Deferrals

• Elective deferrals may be shifted from the ADP test to the

ACP test if:

• The ADP test is satisfied with all deferrals, including those

shifted;

• The ADP test is satisfied with non-shifted deferrals only; and

• Both the ADP test and ACP test use the same testing method

Example – Shifting: Elective Deferrals to ACP Test

HCE NHCE

ADP – pass* 8.00% 6.00%

ACP – fail 3.00% 1.00%

HCE NHCE

ADP – pass* 4.00% 2.00%

ACP – pass 7.00% 5.00%

Shift 4% of deferrals in ADP to ACP

* ADP test passes before and after deferrals are shifted, as required

Check the Plan Document


• HCE definition

• 414(s) compensation definition

• Prior or current year testing method

• ADP/ACP testing procedures

• ADP/ACP correction options

• Source/ordering of distributions

• Attributable earnings

• Catch-up contributions permitted

• After-tax employee contributions permitted

• QNEC/QMAC formulas/conditions

• Matching contribution allocation conditions

2017 NAFE – Session #___ 401(k) Plan Testing 201

For more information, please contact:

Kimberly B. Martin, APA, CPC, QPA

Email – [email protected]

Phone – (904) 556-2394

mailto:[email protected]

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