McKay Hochman and other industry leaders, including ASPPA, asked IRS to include clear guidance in the final 401(k) regulations as to the deadline for amending a plan to change its ADP/ACP testing method. This was requested because practitioners saw the amendment deadline as an issue subject to interpretation. While we taught that the deadline was the end of the year to be tested, we contended that a reasonable argument could be made that this amendment could be made up until 2½ months after the end of the plan year being tested considering that that is the only time that an employer would know that the amendment was actually needed, i.e. when final data had become available. Other practitioners maintained that the plan could be amended even up until 12 months after the end of plan year being tested, as this was the correction period for a failed ADP/ACP test. The IRS remained silent on this issue in the final 401(k) regulations issued in December 2004.

It should be noted that in support of the argument for a delayed adoption date, the prior/current year testing rules already provide safeguards to prevent frequent changes because they require a plan to wait five years after having changed from prior to current year method before being able to return to the prior year method.

The release of IRS Rev. Proc. 2005-66 has settled this adoption deadline issue by including rules for discretionary plan amendments. That procedure states definitively that discretionary plan amendments must be completed by the end of the plan year in which they are to become effective. Changing a plan from prior to current year testing method is a discretionary amendment. Thus, if a plan wishes to change its ADP or ACP testing method from prior to current year or vice versa, it must do so before the end of the plan year for which the test is to be run. Therefore, the testing method may not be changed subsequent to the last day of the plan year being tested.

Note that Rev. Proc 2005-66 also provides that the deadline for legally required plan amendments, such as those mandated by a law or regulatory change, will depend on the underlying law or regulation. Frequently, the deadline is the tax-filing deadline of the sponsoring employer for the tax year during which the amendment became effective (unless a later date is provided in IRS guidance). Thus, if the tax year and plan year are the same the deadline will be the tax filing deadline, which is later than the close of the plan year.