The Current Year Testing Method compares the current year Highly Compensated Employee's average contribution to the current year Non-Highly Compensated Employee's average contribution.
The Prior Year Testing Method compares the current year's HCEs' average contribution to the prior year's NHCEs' average contribution. By using prior year testing, employers can have a guideline to the amount the average Highly Compensated Employee can contribute without the risk of failing testing. However, if the plan does fail testing, the same testing correction methods are applicable. The dilemma with prior year testing is that the HCEs may not be able to defer the maximum possible amount. There may also be issues with using prior year testing and a discretionary match.
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