When should an employer consider adopting a new testing methodology for coverage?

An employer should consider adopting a new testing methodology for coverage primarily when there are changes in the organizational structure. This is because such changes can significantly impact eligibility and participation within the 401(k) plan. When a company's workforce structure evolves—such as through mergers, acquisitions, layoffs, restructuring, or the introduction of new business lines—how employees are classified and their coverage under the plan may need to be reevaluated to ensure fairness and compliance with regulatory standards. A new methodology may help accurately reflect the company’s current situation and meet testing requirements such as the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests.

In contrast, adopting a new methodology every administrative year may not be necessary if there have been no significant changes. High employee turnover is also a factor but does not necessarily trigger a need for a new methodology, as turnover alone doesn't alter the foundational structure of the workforce. Lastly, while legal requirements can dictate when testing methodologies need to change, the dynamic nature of an employer’s organizational structure is a more proactive reason to adopt updated testing approaches, ensuring continuous compliance and adaptability.