Course 5: ADP/ACP Testing Part 2

The process to determine the refund amount:

1. Calculate the total correction amount by using the "Leveling Method" based on ADRs 2. Apportion the total correction amount by eligible HCEs by using the "Leveling Method" based on deferral amounts 3. Recharacterize corrective distribution toward unused catch-up contributions 4. Apply allocable earnings to the refund amount

What are the shifting techniques?

1. Counting Qualified Matching Contributions in the ADP test 2. Include elective deferrals in the ACP test

What are the 6 steps in the ACP Test?

1. Determine Current/Prior Year method for NHCE deferrals 2. Determine which participants are eligible 3. Determine the HCE/NHCE groups 4. Calculate each employee's ACR 5. Calculate each group's ACP 6. Determine if the ACP test passes by comparing the HCE ACP with the NHCE AC

What is the 6 step process of the ADP Test?

1. Determine Current/Prior Year method for NHCE deferrals 2. Determine which participants are eligible 3. Determine the HCE/NHCE groups 4. Calculate each employee's ADR 5. Calculate each group's ADP 6. Determine if the ADP test passes by comparing the HCE ADP with the NHCE ADP

How to calculate ACP test:

1. Determine whether current year or prior year method 2. Determine which participants are includible 3. Determine the HCE/NHCE groups 4. Calculate each employee's ACR 5. Calculate each group's ACP 6. Determine if the ACP test passes by comparing the HCE ACP with the NHCE ACP

How to calculate the Minimum ADP:

1. Divide and subtract (take the greater value) 2. Divide by 1.25 3. Compare and take the lesser of the two above values

4 different ways to apply QNEC

1. Pro Rata to all NHCP 2. Pro-Rata to employed NHC participants 3. Per Capita to all NHC Participants 4. Per Capita to employed NHC participants

What are the 3 correction methods permitted by law to correct a failed ADP or ACP test?

1. Shifting ADR deferrals from the ADP test to the ACP test 2. Making a QNEC 3. Making a corrective distribution

What are the 5 steps for shifting ADP deferrals into the ACP test?

1. The ADP test must pass and the ACP test is failing 2. Calculate the ADP cushion 3. Shift the ADP cushion to the ACP test 4. Calculate the new ACRs post-deferral shift 5. Rerun the ACP test post shift

As a general rule, a failure of the ADP or ACP test must be corrected within a _____________.

12-month regulator correction period

Taxable Year

ADP or ACP refunds are taxable to the participant in the year they are received

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

Through what system can the employer avoid treatment of the 401(k) arrangement as a nonqualified CODA by correcting the ADP failure after the regulator correction period has passed?

Employee Plans Compliance Resolution System (EPCRS)

What does the ACP test measure?

Employer matching contributions and after-tac employee contributions

An HCE can elect to have a refund instead of having excess contributions recharacterized as catch-up contribution. T/F?

False

EPCRS can only be used to correct a failed ADP or ACP test within the 12-month period following the end of the plan year being tested. T/F?

False

When the prior year testing method is selected in a plan document, the plan uses the compensation, deferral, and eligibility for the prior year's plan for all participants. T/F?

False

Choose the two methods that are permitted by law to correct a failed ADP or ACP test.

Making a QNEC Making a corrective distribution

How is a QNEC applied?

May be used to correct either a failed ADP or failed ACP test.

ADP Cushion =

NHCE ADP - Minimum Passing NHCE ADP

Are catch-up contributions/deferrals included in the ADR?

No

If the plan is using the Prior Year method, should we use a QNEC?

No

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

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

In order to shift contributions from the ADP to the ACP test, the same testing method must be used. T/F?

True

The IRS limits the amount of QNECs that can be included in the ADP or ACP test. T/F?

True

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"

A QNEC is a nonelective contribution that...

can be used to correct either a failed ADP or ACP test

The ACP test measures...

employer matching contributions and employee after-tax contributions

How does a QNEC get allocated to participant's?

is defined in the terms of the plan document. Often will be designed so that QNECs are only allocated to NHCEs

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

Leveling Method

is the process of leveling the excess amounts the HCEs

What does CODA stand for?

non-qualified cash or deferred arrangement

Code 8

represents a corrective distribution of excess deferrals, excess contributions, and excess aggregate contributions that is taxable in the same year as distribution

Premature Distribution Penalty

the 10% penalty tax for premature distributions is not applicable to corrective distributions

What is the ADP cushion?

the amount of excess NHCE deferrals above the minimum passing rate of the test

If the violation of the ACP test is not corrected within the 12-month regulatory correction period, then...

the entire plan is disqualified

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

As a general rule, a failed ADP or ACP test must be corrected...

within the 12 month period following the close of the plan year being tested