ACP Testing for Safe Harbor Plan That Suspended Match Contributions

“Our ERISA [Employee Retirement Income Security Act] 403(b) safe harbor retirement plan recently suspended it’s matching contributions. We realize that we must perform actual contribution percentage (ACP) testing for our matching contributions the 2020 plan year. We are wondering if we can use the “prior-year testing method” for ACP testing for the 2020 plan year, as that would make it easier for us to pass.”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Before we answer your question, the Experts should explain the “prior-year testing method” for those who might not know. Under the prior-year testing method, you compare the ACP of nonhighly compensated employees (NHCEs) in the PRIOR year (in this case, 2019) to the annual contribution percentage of highly compensated employees (HCEs) for the current year (2020 in this case). See Treasury Regulation section 1.401(m)-2(a)(2)(ii). Not only does this allow sponsors to plan ahead in determining a level of match for HCEs that will pass testing, in your particular case, it would also take advantage of a presumably higher ACP for NHCEs in 2019, since the match was in effect for a full year and not suspended.

Unfortunately, for safe harbor plans that suspend their safe harbor matching contributions, the IRS does NOT permit prior-year testing, only current-year testing (where the NHCE ACP for 2020 would be compared to the HCE ACP for 2020). If your plan was NOT a safe harbor plan, it could use prior-year testing if that method was stipulated in the plan document. Recent IRS guidance regarding contribution suspensions in safe harbor plans affirmed this position. See Notice 2020-52.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.