With prior year testing, such contributions would have to be made by the last day of the testing year, to be credited to the NHCEs for the prior year. This does not allow any time to determine the amount necessary for such corrective contributions, which makes this option impractical with prior year testing. The law permits employers to switch from prior year testing to current year testing at any time. Regulations also permit employers to switch from current year to prior year testing until the end of the remedial amendment period, which is currently set to expire on the last day of the plan year beginning on or after January 1,2000. After then, a switch to prior year testing can only be made after the plan has used current year testing for at least five consecutive years or, if less, the number of years the plan has been in existence.
Special rules apply for plans that are aggregated due to merger.
By the end of the remedial amendment period, the plan document must specify the testing method used each year. The prior year method can be a big help in planning current year strategies for the HCEs which will improve the chances of passing the tests. This will reduce the burden of having to make refunds of excess contributions or take other corrective measures. Prior year testing may not be the best alternative for every situation. The prior year method can always be changed to current year, but there are some limitations for switching from current year to prior year.