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