Is it true that the testing method designation (prior year or current year) refers to the plan year data?

The assertion that the testing method designation (prior year or current year) refers to plan year data is true. In the context of 401(k) plans, testing methods are used to ensure compliance with regulatory requirements, particularly regarding contributions and discrimination testing.

When the term "prior year" is used, it indicates that the data from the previous plan year is being utilized to assess whether the plan meets the necessary compliance tests for the current year. On the other hand, if the "current year" designation is chosen, it means that the testing is using the data from the current plan year to evaluate compliance.

This distinction is critical because the method selected can impact a plan's ability to pass required tests, such as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. Using prior year data can provide insights based on historical participation and contribution patterns, while using current year data reflects the current plan's dynamics and participant behavior.

Understanding this relationship between testing methods and plan year data is essential for qualified 401(k) administrators to ensure that plans remain compliant and to mitigate potential compliance risks.