Overcoming Barriers in the Annual 401(k) Compliance Test

Overcoming Barriers in the Annual 401(k) Compliance Test

By Congruent Solutions

© 2020-2021 All Rights Reserved, No part of this document should be modified / used without prior consent.

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Nondiscrimination compliance testing is one of the most significant regulatory hurdles that sponsors of defined contribution retirement plans must overcome. Passing these standards is crucial from an employee relations perspective, as well as being essential for sustaining the viability of a tax-qualified plan. To ensure that employees who are highly compensated are not paid more than employees who are not well paid, keep reading to learn the obstacles to completing the yearly 401(k) plan compliance testing.

Annual testing: When conducting and passing these annual standard nondiscrimination tests, all employees who are eligible to participate in the plan, regardless of whether they use it, must be considered.

Because the tests follow the IRS's tax code regulations, it is frequently up to finance and accounting experts to ensure compliance.ADP testing, or the actual deferral percentage test, In this investigation, the elective deferrals of highly compensated employees are contrasted with those of lowly compensated employees. The average deferral percentage for both groups is calculated by adding up and averaging the percentages for each group's employees.

Include additional individuals: Making sure the plan does not benefit highly paid employees more than other employees is the ideal way to prevent issues with nondiscrimination testing. Unsurprisingly, because of low participation and low contribution levels among lower-paid employees, the majority of 401k plan administration softwares fail nondiscrimination testing. Therefore, if a corporation wishes to prevent further nondiscrimination testing failures, boosting enrollment and participation levels among these people is crucial. For instance, employers can require new recruits to enrol automatically in the 401(k) plan unless they actively choose not to. They automatically start withholding a certain percentage of employee contributions from salaries, say 2 percent, and invest the money in a specific type of fund, either a balanced fund or a target-maturity asset allocation lifecycle fund that switches to a more conservative strategy.

Seek Federal Protection: This is demonstrated by using one of the two safe-harbor plan designs authorised by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, which allows plan sponsors to completely omit nondiscrimination testing. The first safe-harbor design option mandates that the plan sponsor match 100% of non-highly compensated employees' pre-tax © 2020-2021 All Rights Reserved, No part of this document should be modified / used without prior consent.

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contributions up to 3% of their salary, plus 50% of the next 2% of pay. The second safe-harbor design option mandates that plan sponsors fund all non-highly compensated employees' accounts with at least 3% of their income, regardless of whether those employees make voluntary contributions to the plan. Any safe-harbor architecture that a corporation chooses must result in immediate vesting of all company contributions.

Find the best 401k plan compliance testing that also helps you save money to keep you financially independent. Congruent provides the best retirement plan administration services, which also prevents and secures data by keeping it encrypted and from getting breached.

© 2020-2021 All Rights Reserved, No part of this document should be modified / used without prior consent.

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