RPF M5 U4 Nondiscrimination Testing Flashcards
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What is the Actual Contribution Percentage (ACP) Test?
The test performed to show that employer matching and after-tax employee contributions are nondiscriminatory.
What is the Actual Contribution Ratio (ACR)?
It is a calculation of the individual’s total contributions included in the ACP test divided by the individual’s compensation.
What is the Actual Deferral Percentage (ADP) Test?
The test performed to show that pre-tax elective contributions and designated Roth contributions are nondiscriminatory.
What is the Actual Deferral Ratio (ADR)?
It is a calculation of the individual’s total contributions used in the ADP test divided by the individual’s compensation.
What is the Current Year Testing Method?
A methodology used in ADP and/or ACP testing whereby the NHCE averages in the current year are compared to the HCE averages in the current year.
What are Excess Aggregate Contributions?
Contributions attributed to a failure of the ACP test.
What are Excess Contributions?
Contributions attributed to a failure of the ADP test.
What is the Prior Year Testing Method?
A methodology used in ADP and/or ACP testing whereby the NHCE averages in the prior year are compared to the HCE averages in the current year.
What is a Qualified Matching Contribution (QMAC)?
A matching contribution that is 100% vested and subject to withdrawal restrictions; it may be used in the ADP and/or ACP tests.
What is a Qualified Nonelective Contribution (QNEC)?
An employer contribution that is 100% vested and subject to withdrawal restrictions; it may be used in the ADP and/or ACP tests.
What is the purpose of ADP and ACP testing?
To demonstrate compliance with nondiscrimination statutes under the IRC for qualified plans.
Who is included in ADP testing?
Only benefiting participants are included, meaning those eligible to defer pre-tax or designated Roth contributions.
What is the first step in calculating the ADP test?
Determine whether current or prior year data is used for NHCE deferrals.
Who is included in ACP testing?
Participants eligible to receive matching contributions or make after-tax contributions, regardless of actual receipt.
What is the first step in calculating the ACP test?
Determine whether current or prior year data is used for NHCE contributions.
What must be done if a plan fails ADP or ACP testing?
Corrective action must be taken to maintain qualified status and eligibility for favorable tax treatment.
What are common methods for correcting a failed ADP test?
Refunds of excess contributions to HCEs or making a qualified nonelective contribution (QNEC) to NHCEs.
What are common methods for correcting a failed ACP test?
Refunds of excess aggregate contributions to HCEs, forfeiture of matching contributions, or calculation of a qualified matching contribution (QMAC).
What is the timing for corrections after a failed ADP or ACP test?
Corrections must be made within 2.5 months after the plan year-end or 6 months for EACA plans.
What are safe harbors for nondiscrimination testing?
Plan provisions that allow employers to avoid ADP/ACP testing, including safe harbor match and safe harbor nonelective.
What is a safe harbor match?
A matching contribution that cannot have continuing requirements and matches dollar for dollar on up to 3% of compensation.
What is a safe harbor nonelective contribution?
A contribution of 3% of compensation allocated to participants regardless of whether they defer or not.
What is a safe harbor nonelective contribution?
A safe harbor nonelective contribution is allocated to eligible participants regardless of deferrals and is 3% of the participant’s compensation. It cannot have continuing requirements such as employment on the last day or certain hours worked.
What is the minimum nonelective contribution after the SECURE Act?
After the SECURE Act, safe harbor plans adopted late in the year require a minimum nonelective contribution of 4%.
