As a 401(k) Plan administrator, in the early part of the year, you’ll receive notice from your Plan provider that your non-discrimination testing, ADP/ACP testing, Top Heavy testing, etc. are ready for your review.
You are probably asking yourself “what is this and how do I review all this information? Well, administrators of 401(k) Plans are required to conduct what is called “non-discrimination testing” each year to remain compliant with ERISA (the Employee Retirement Income Security Act).
There are several required tests, but some may not apply to your Plan depending on its design. It is important to understand the different types of tests and what you should review in the results.
- ADP/ACP Testing – Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests are used to ensure the Plan does not discriminate or favor highly compensated employees and participants when compared to all employees/participants. Items to review in these tests involve the Plan Census to make sure it includes all employees and that the compensation and deferral amounts are accurate.
You also should ensure the employees identified as highly compensated are correct. The definition of highly compensated changes each year so double check the IRS website to verify the dollar amount used for each year has been applied accurately.
- Top Heavy Testing – This test is to review the overall accumulation of benefits in the Plan to ensure the employees designated as “key” have not accumulated more than 60% of the total assets in the Plan. The important item to review for this test is the employees designated as “key”.
The IRS defines a “key” employee as an officer of the company making more than a specified dollar amount. Be sure to check the IRS website to verify the appropriate indexed amount as the amount changes each year). Another “key” person(s) may be an owner of the company that owns either 5% or more of the business or owns more than 1% of the business and had compensation greater than $150,000 during the year. Double check that you have identified the individuals that should be designated as “key” and that this was applied during the testing.
- 410(b) Coverage Testing – This test compares the percentage of eligible highly compensated employees that are benefiting from the plan to the percentage of non-highly compensated ones. Once again, this is to ensure that the Plan is not overly benefiting only the highly compensated employees. As long as you have designated the individuals as highly compensated (see above) correctly and verified the Plan Census data is complete and accurate the results of this testing should be accurate as well.
Once you have reviewed the data used in the testing and verified its accuracy, review the results of the testing. The provider will indicate if corrections are needed. Follow the instructions and ensure the corrections are made to the timeline specified. If you have any questions, contact your Plan provider to ensure you complete all required actions.
Retirement plans can be very complex. As an innovative firm Summit CPA specializes in 401(k) audits. We have the ability to offer assistance entirely off-site with little or no distraction to your daily office routine. We also offer flat-fee pricing so there are no surprises on your bill when the job is complete. For assistance contact our office at (866) 497-9761 to schedule an appointment.