Test anxiety isn’t just for students. The words “nondiscrimination testing” can
strike fear into even the bravest of retirement account managers and plan sponsors alike.
Plan testing is required each year in order to make sure
your 401(k) plan is in compliance with IRS regulations and maintains its
qualified, tax advantaged status. The
IRS allows employees to get a tax benefit by not having to pay taxes on
contributions or the earnings from contributions until they withdraw the
money. However, in order to get this tax
break, the IRS wants to make sure highly paid employees are not getting a
better tax break than everyone else.
Of the required tests, the
Actual Deferral Percentage (ADP) and
Actual Contribution Percentage (ACP) tests are more significant because
consequences of a failed test need to be addressed within 2 and a half months after the
close of the plan year, in order to avoid penalties.
Consequences include corrective distributions
or additional employer contributions.
The
nondiscrimination rules in regards to these tests require average deferrals and
average contributions for the highly compensated employee (HCE) group to be
within a certain range of the average deferrals and contributions for the non-highly compensated employee (NHCE) group.
Clear as mud, right?
Well that's where
Alliance Benefit Group comes in to take your worry
away.
We will ask you a few questions
regarding your plan and have you confirm that the employee information we have
in our system is correct.
If we receive
this information in a timely manner, it will help us ensure the testing is completed before
the deadline.
In the event the plan
fails any of the nondiscrimination tests, we will call you and talk you through
the next steps of the correction method and offer guidance on how to avoid
testing failures in the future, such as adopting a safe harbor plan or running
preliminary tests throughout the year and making adjustments accordingly.
So, if your plan runs on a calendar year, you would have
received your questionnaire from us. If you haven't yet, we need it to be completed and returned to kick
off this process. Please return this to
your administration team at your earliest convenience.
The Author: Kelly Wangsness, QKA
Retirement Services Manager
kwangsness@abg-mn.com
