QKA 2 Unit 4 ADP/ACP Testing Part 1 Flashcards
The actual deferral percentage (ADP) test is the exclusive means to show deferrals to the 401(k) arrangement satisfy nondiscrimination requirements of what internal revenue code?
401(a)4
The actual contribution percentage (ACP) Test applies to which arrangement?
401m
What contributions are evaluated in the ACP test?
Employer match,
after-tax contributions
What are the three types of plans that did not require ADP or ACP testing?
Plans which only consist of NHCEs
Plans consisting of only HCE’s
Safeharbor plans
What is the first step in the ADP test?
Go to the adoption agreement and determine whether current or prior year. Data will be used to calculate.
What are the remaining steps for the ADP test once the data to be measured is determined?
Determine:
1) which participants are eligible
2) NHCE and HCE groups
3) calculate each employees average deferral rate
4) calculate the average deferral percentage for each group
5) compare the average deferral percentage for the HCE group against the NHCE group
When a plan, elects to use prior-year data for the ADP test what information is used for HCEs?
HCEs always use Current year data
When prior-year data election is selected for NHCEs, what three measurement items does that enCompass?
Compensation
Deferral,
Eligibility
What is the average deferral rate calculation?
ADR = Deferrals / compensation
What two types of data excluded from the ADP test? What is the iRC maximum income considered?
Catch up contributions
Corrective distributions
Compensation is limited to the 401(a)17 maximum limit
What is the calculation for the average deferral percentage for the groups?
ADP = Sum (ADRs) / # of group members
What are the three steps of the calculation to compare the HCE group ADP to the NHCE ADP?
1) Calculate the lesser of
A) NHCE Group ADP X 2
B) NHCE Group ADP + 2%
2) Multiply NHCE ADP X 1.25%
3) Determine Greater Value between Step 1 & 2
What are the steps after calculating the HCE and NHCE Group ADPs?
Compare to determine pass/fail status
If test fails, does the agreement allow for disaggregated testing?
On a failed ADP test, you look at the adoption agreement to see if it permits disaggregated testing and determined it does not. What are the next steps?
Amend the plan to include
What’s the best practice when doing a midyear evaluation of a client Plan related to ADP testing related to disaggregation?
Run the test with and without disaggregate, testing to see which produces the best results
What is the 1.25% test related to ADP?
The 1.25% test is satisfied if the ADP for the HCE group does not exceed 1.25 times the ADP for the NHCE group.
What conditions satisfy the 2% spread test related to ADP?
1) not more than two percentage points, greater than the ADP of the NHCE group
2) not more than twice the ADP of the NHCE Group
Which test spread provides the best advantage for HCE’s in the ADP test when the NHCE group average is less than 2%?
Multiplying the NHCE ADP X 2
When the NHCE ADP is between two and 8% what is the best test to provide the greatest outcome for HCE’s?
Take the NHCE average and add 2
Which ADP test spread provides the best outcome to HCEs when the NHCE average is greater than 8%?
Multiply the NHCE average by 1.25%
To pass the ACP test, the HCE group must satisfy either the blank test or the blank test?
1.25 or 2% test.
Because the ACP test need to only satisfy one of the two tests (1.25 or 2%), what happens if both tests are passed?
The greater of the two results under both test set the limit for the HCE group
What is the special consideration that would apply to discretionary matching having to do with ACP testing?
Because HCE data is Current Year and NHCE data is Prior year, fluctuations in funding can create testing failures.
You can make a switch from prior year testing to Current year testing method as long as the change is made by the end of the current year, true or false?
True
If a plan switches to Current year testing method, how long must that method be used before being allowed to switch back to prior?
Five years
The actual contribution ratio or ACR is determined by what calculation?
Divide the participant contribution amount by the participants IRC 414s compensation
If the plan allows for catch-up deferrals and a Participant’s catch-up deferrals are matched, then the matching contributions are excluded from the participants contribution amount, true or false?
False catch-up match would be included for the actual Contribution ratio
Forfeitures that are allocated for employees are not counted in the ACR true or false?
False they are included
What type of compensation is used for determining ACR?
IRC 414S
A Plans, ADP and ACP tests must be tested in the same way that what is satisfied?
Coverage testing
If coverage testing is satisfied, using disaggregation, then what must happen with the ADP and ACP tests?
They must be tested with disaggregation as well
Which test uses statutory eligibility?
When applying disaggregation
What is another form of disaggregated testing?
The early participation test
The early participation test is applicable to all nondiscrimination tests, true or false?
False it is only applicable to the ADPACP tests
In the early participation test all HCE’s are tested regardless of what? How are the NHCE’s tested?
Whether the HCE satisfy statutory eligibility or not
Test only NHCEs that satisfy statutory eligibility
When running the ADP test, using the early participation test, you will be required to run two ADP tests like the otherwise excludable, disaggregation method, true or false?
False. Even though the early participation testing method is a disaggregation method we only have one ADP test, which includes all HCE’s, regardless of their statutory status, and all NHCEs who meet statutory eligibility.
The coverage test does not need to be spelled out in the plan document, however, the IRS requires what determination to be placed in the plan document for ADP and ACP?
Prior year or current year testing method elected
The prior year method is helpful for the ADP test because it gives what to the HCE’s?
Predictability
The prior year method can be problematic for the ACP test, if what is included?
Discretionary matching contribution
If changing the plan document to move from a prior year to a current year testing method, the plan amendment has to be in place no later than what day?
By 12/31 of the current year
What are the four exceptions to the five year rule for moving a plan from current year method to prior year method?
1) planes that have been in existence for less than five years, but have use the current year method every year in existence
2) safe harbor plan years count as current year planned methods, even though they are not tested
3) aggregate, testing of multiple plans, require the usage of current year for each plan for the last five years
4) there’s an exception for plans to go through a business transaction that may allow them to switch earlier than five years
What are two clues that it might make more sense to use the otherwise excludable employees testing method?
NHCEs who do not meet statutory eligibility & 0% or low deferral rates
Large number of participants that do not meet statutory eligibility?
What are 2 clues that you should use the early participation testing method?
Look to see if HCE’s have 0% or low deferral rates that also do not meet statutory eligibility
A plan with a high percentage of NHCE’s that meet statutory eligibility and have high deferral rates might suggest using early participation
There are two ways to correct a failed ADP/ACP test. What are they?
HCEs can take corrective distributions
The employer can make additional contributions through QNEC’s or QMAC’s
Corrective Distributions for a failed ADP test is called?
Excess contributions
Corrective Distributions for a failed ACP test are called
Excess aggregate contributions
QNEC’s to eligible participants on a failed ADP test, are dependent on whether an employee defers money into the 401(k) or not?
Whether an Employee uses the 401(k) and makes deferrals, has no bearing
QMAC contributions are based on what?
A Participant’s deferrals during the plan year
