We are trying to determine if we can raise the 401(k) rate for our HCEs beginning in 2002.

Due to the increased compensation limit for next year, we fail the 125% ACP test because we have an after-tax feature in our plan. I was told that I can use the Alternate (+2%) Rule, but can't really find anything in plain English to explain. Everything I find dates back to 1990, and I know there were changes from the small business act a few years ago. If we can use it, we pass.

Can someone point me in the right direction, or give an easy to understand explanation of the various ways to perform ADP/ACP tests and the choices you have?

Your current plan document should have a section dealing with ADP/ACP testing alternatives, and it should be about as clear as anything else. Ignore the part about the "multiple use of the alternative limitation" prohibition. That is repealed effective 1/1/2002.

Thanks! Easy to understand is not how I'd describe our Plan Document, but I did find the section. It says we could use the +2% rule if we fail the 125% test.

Has there been any change to the rule, or can we rely on being able to use it for from now on for ADP/ACP testing? As I said, once we increase the comp limit to $200K, we fail the 125% ACP test without making a single change.

The 2% alternative limitation has not been changed by recent legislation.

Also, for plan years beginning in 2002 no more multiple use test!

I keep hearing about the multiple use test going away next year, but can't find out what it is. Quick explanation?

real quick.

Plan passes ADP by 2 points
Plan passes ACP by 2 points
Govt says do not Pass go, do not collect 200.
Only one plan can pass 2 points, the other must pass 1.25 test
(or the multiple use, which is an average of the two)

hurray, in 2002 that has been eliminated.

Thanks! Works for us anyway - we pass 1.25 on ADP, fail on ACP, but pass ACP with 2%