Chapter 2 - Coverage and Nondiscrimination Testing

Question 1

Excess deferrals

Answer 1

Contributions of elective deferrals in excess of the 402g limit which is currently $18,000. This is a limit on an individual tax payer.

Question 2

Excess contributions

Answer 2

Amount of elective deferrals contributed by HCEs which causes the ADP test to fail.

Question 3

Excess aggregate contributions

Answer 3

Any employer matching or after tax employee contributions for HCEs that is causing the ACP test to fail.

Question 4

ADP

Answer 4

Actual Deferral Percentage

Question 5

ACP

Answer 5

Actual Contribution Percentage

Question 6

1.25 Test and the 2 x 2+ Test

Answer 6

For the ADP test you and use 1.25% of the NHCEs or the lesser of 2x or + 2% of the NHCEs.

If the ADP of the NHCEs is equal to or less than 2%, double the percentage to arrive at the limit of the HCEs

If the ADP of the NHCEs is between 2 and 8%, add 2% to arrive at the limit of the HCEs

If the ADP of the NHCEs is greater than 8%, the 1.25% produces the better result for the limit of the HCEs

Question 7

Mandatory Disaggregation for Coverage Testing

Answer 7

Each portion of the generic 401(k) is tested on it’s own for the coverage test. 401(k), 401(m), and 401(a).

Question 8

Coverage Test of the 401(k)

Answer 8

These are elective deferrals, Pre-tax and Roth

• Benefiting for purposes of coverage - if they are elegible to make an elective deferral at any point during the plan year. People under suspension are included as benefiting
• One time irrevocable election - if this is made by a participant, they are not considered elegible to defer and as a result are not benefiting under the 401k.

Question 9

Coverage Test for the 401(m)

Answer 9

These are the employer match, after tax contributions, and QMAC.

• If the plan only allows after tax and does not provide for a match, those benefiting are those who have it available.
• When it only provides a match, no after tax: you are considered benefiting if you had received a match if your had deferred.
• If there is a match, you can also have provisions that to get the match you have to make an elective deferral, be employed on the last day of the PY and a 1000 hour requirement. Those who don’t meet those provisions are not benefiting If they did not work 500 hours. They can be statutorily excluded.
• For purposes of coverage, all matching contributions are included in the test.
• If the plan offers match, after tax, and has last day and 1000 provisions, the after tax supersedes all.

Question 10

Coverage Test of the 401(a) - PS

Answer 10

These are non elective employer contributions and QNECs

• A particpant is considered benefiting if they received an employer non elective contribution.
• It can have last day or 1000 hour provisions. You can statutorily exclude is the part termed in teh year and had less than 500 hou

Question 11

1.25 v 2x2, which is better?

Answer 11

As with the ADP test, the general rules for which test is better are as follows:

• If the ACP of the NHCE group is equal to or less than 2%, double that percentage to arrive at the limit for the HCE group.
• If the ACP of the NHCE group is between 2% and 8%, add two percentage points to determine the maximum for the HCE group.
• If the ACP of the NHCE group is greater than 8%, the 1.25 test produces the better result and sets the limits for the HCE group.

Question 12

Compensation used for the ADP Test

Answer 12

It is permissible to use participation compensation for the ADP test.

The definition of ADP test compensation is not required to be the same definition that was used to determine compensation eligible for deferral.

ADP test compensation is subject to the compensation dollar limit under IRC §401(a)(17).