A company has salaried employees and also has two collective bargaining units (CBU1 and CBU2). The company maintains a 401(k) plan which, prior to 1998, covered the salaried employees and CBU1 only. Neither CBU1 nor CBU2 had any highly compensated employees (HCEs) prior to 1998 so ADP testing was not performed for the union employees. In 1997, 5 employees in CBU2 earned in excess of $80,000. As of June 1, 1998, CBU2 also became eligible to participate in the 401(k) plan as part of their new collective bargaining agreement. Therefore, in 1998, the union employees eligible for the 401(k) plan are now required to be tested since there are HCEs who are union employees.

Questions: Since the collectively bargained employees must be tested separately, what is the prior year NHCE ADP for the union employees since testing was never required prior to 1998 (and it's not a new 401(k) plan)? Or, is there even a prior year non-HCE ADP? Would the company be required to create the non-HCE ADP for the union employees who were eligible for the plan in 1997, or would they have to use current year data for this group in 1998?

Testing is still required in the absence of HCE's. The non-discrimination test was deemed to be met since tha Plan had no HCE's participating.

a) run prior years ADP/ACP/MUT for NHCE's ADP/ACP
b) use "current year data" for test

ACP testing is treated as satisfied for collectively bargained employees. See Section 1.401(m)-1(a)(3).

Because the portion of a plan covering each collective bargaining unit can be treated as a separate plan (see Section 1.401(k)-1(g)(11)(B), I also think it would be permissible to treat the CBU2 portion of the plan for ADP testing purposes as if it were a new plan for 1998. (I am assuming that the sponsor would not wish to treat the two CBU portions of the plan as one plan.)



[This message has been edited by Wessex (edited 08-18-1999).]