Term
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Definition
| "For a new plan, there is no prior year data for the NHCE group. Therefore, the IRC provides that the NHCE group's ADP is deemed to be 3 percent under the prior year testing method, unless the plan provides that it will determine the prior year ADP on the basis of the actual NHCE data for the first plan year. If the actual NHCE is used for the first plan year under a plan the uses the prior year testing method, then that data will be used twice for testing purposes: once for the ADP test run for the first plan year, and again for the ADP test run for the next plan year. " |
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Term
| Disaggregated plans testing method |
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Definition
| "If the disaggregated plans testing method option is used for ADP or ACP testing, statutory employees and otherwise excludable employees are completely disaggregated, as if each group participates in a separate plan: one covering the otherwise excludable employees, and the other covering the statutory employees. A separate ADP and , if applicable, a separate ACP test, is performed for each disaggregated plan. " |
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Term
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Definition
| "As a general rule, a 401(k) arrangement within a plan is treated as a single 401(k) arrangement, subject to a single ADP test (unless a testing exception, such as the safe harbor rule under IRC 401(k)(12), applies). However, sometimes the 401(k) arrangement has to be divided up (known as disaggregation) as if it consisted of two or more separate 401(k) arrangements. When that happens, the disaggregated 401(k) arrangements apply the nondiscrimination testing rules as if they were separated plans. The same principles apply to the 401(m) arrangement under a plan." |
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Term
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Definition
| "When a plan switches from using the current year testing method to using the prior year testing method. The NHCE data from plan year 1 is used twice for testing purposes: once to run the test for plan year 1 and again to run the test for plan year 2. Because the NHCE data from plan year 1 has already been used to run the test in the plan year, the double-counting limits affect how the data is used again when the prior year testing method is used in year 2. The double counting limits apply only after there is a switch from using the current year to prior year testing method in the next plan year. " |
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Term
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Definition
| "The early participation rule makes the ADP and ACP test simpler to perform when otherwise excludable employees are disaggregated for coverage testing purposes, because only one set of tests is required." |
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Term
| IRC 410(b)(6)(C) transition period |
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Definition
| "A controlled group situation can affect coverage testing. When a company is involved in a merger, acquisition, disposition, or spin-off, the make-up of a controlled group or affiliated service group may change. Under a special rule in the IRC, a plan that satisfies coverage at the time of the acquisition or disposition of a related group member is deemed to meet coverage during a transition period following the transaction. This transition period is sometimes referred to as the IRC 410(b)(6)(C) transition period. " |
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Term
| Mandatory aggregation rule |
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Definition
| "If an HCE participates in more than one 401(k) arrangement of the same employer (or a controlled group or affiliated service group), the deferral amounts in all such arrangements are added together in computing the HCE's ADR under EACH arrangement. We refer to this as the mandatory aggregation rule." |
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Term
| Otherwise Excludable employee |
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Definition
| "The IRC and the 401(k) and 401(m) regulations provide for a special testing rule for plans the cover employees sooner than the law requires. These employees are called otherwise excludable employees. Specifically, an otherwise excludable employee is an eligible employee who would not have been an eligible employee if the one-year-of-service and/or age-21 age requirement permitted by the IRC were imposed. Employees who have completed these maximum eligibility requirements are called statutory employees." |
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Term
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Definition
| "Under the coverage rules, plans may be aggregated to satisfy the coverage tests. This is known as permissive aggregation, because the employer is deciding whether to aggregate the plans in demonstrating whether coverage is satisfied. If plans are not aggregated for coverage, they are treated as separate plans for nondiscrimination testing." |
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Term
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Definition
| The otherwise excludable employee rule is the only permitted testing option that divides the eligible employees into separate groups for ADP and ACP testing purposes. The Treasury refers to this as restructuring. |
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Term
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Definition
| An employee that has satisfied the one-year-of-service and/or age-21 age requirement permitted by the IRC. (see otherwise excludable employee term) |
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Term
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Definition
| A plan may not use the 3 percent rule if it is a successor plan to the prior 401(k) plan. A successor plan for this purpose is a plan in which 50 percent or more of the eligible employees for the first plan year were eligible under another 401(k) plan maintained by the same employer in the prior year. The successor plan concept is also used to determine if a newly established plan may be treated as a new plan for purposes of the safe harbor 401(k) rules. |
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