What Sentry can do to help you prevent year-end testing issues
If you’re a 401(k) plan sponsor, you’re well aware of the annual year-end review process. You might hear this process often referred to as compliance, or nondiscrimination, testing. Here are a few questions to consider:
Are you failing your plan's nondiscrimination testing? Are your participants getting taxable refunds on contributions they made to their 401(k) plan?
Are you aware you can make changes to your plan to help reduce the likelihood of a testing failure and receiving taxable refunds?
Did you know certain types of transactions done by your company during the year can affect testing, like acquiring another business or selling part of your business?
Not sure? Let Sentry help.
Our team of specialists can evaluate your current plan and help you identify potential opportunities for improvement.
Types of 401(k) nondiscrimination tests
A primary standard of qualified retirement plans is that they can’t favor participants who earn more. Performed every year, these nondiscrimination tests are a handy tool for detecting any potential problems and helping ensure your plan is set up to benefit all employees.
Actual deferral percentage (ADP) and actual contribution percentage (ACP): Helps ensure your plan doesn’t unfairly benefit highly compensated employees (HCEs). Failures must be remedied by March 15 each year to avoid penalties.
Top-heavy: Compares the value of key employee accounts to the value of all employee accounts. The plan is deemed top-heavy if the value ratio of key employee accounts to all employee accounts exceeds 60%. Additional contributions to non-key employees may be due if the plan is top-heavy.
402(g) limit: Determines if the individual deferrals made through pretax and Roth deferrals are within the annual limit set by the IRS for that plan year. Any excess amounts must be refunded.
415 limit: Helps ensure you haven’t exceeded the total contribution limit set by the IRS for that plan year. This includes all sources (pretax, Roth, match, profit sharing, etc.).
410(b) coverage: Helps ensure your 401(k) plan covers a sufficient number of non-highly compensated employees (NHCEs). If failed, additional NHCEs may need to benefit.
Note: Safe harbor 401(k) plans, in general, let you skip most of these annual tests by creating incentives for more of your employees to save.
How do you correct a plan failure?
If your plan fails any one of the above tests, don’t worry—it happens. But you’ll need to take steps to fix it and avoid major consequences. For example, the most utilized corrective action is withdrawing contributions—and sometimes earnings—from the plan and refunding them to HCEs.
Compliance testing resources
In addition to our experienced team members, we also offer educational resources to help guide you as you perform your plan sponsor duties.
Identifying HCEs and key employees
This document can help you identify which participants qualify as HCEs, helping you submit accurate information to your provider.
Roth deferral option
This resource walks you through how to contribute to a Roth 401(k) account and the deferral limits that go along with it.
Compliance calendar checklist
There’s a lot you need to keep track of as a plan sponsor. Review this resource to help keep track of compliance deadlines.
