Compliance Testing

We Understand Compliance Testing. And we'll work with you to make your Plan compliant.

The Employee Retirement Income Security Act (ERISA) requires several tests each year to prove 401(k) plans do not discriminate in favor of employees with higher incomes.

For some of the tests, employees are divided between non-highly compensated employees (NHCEs) and highly compensated employees (HCEs). The Internal Revenue Service (IRS) defines "highly compensated employee" as an individual who:

Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
For the preceding year, received compensation from the business of more than $120,000 (for 2018), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

The compliance tests help verify that funds are being allocated properly and in a timely manner. The non-discrimination tests help ensure that all eligible employees in a company have been afforded the same opportunity to participate in the plan. A 401(k) plan that provides for pretax, Roth, matching and/or profit sharing contributions is subject to special nondiscrimination tests. The IRS requires that your company’s retirement plan show that it provides comparable benefits to all employees — rank-and-file employees as well as the highly compensated ones.

While compliance testing does benefit the participants it also puts a burden on the plan sponsor to complete. Our objective when reviewing compliance testing is to produce better test results so the highly compensated can defer as much as possible. The providers only use the data they are given to generate the test therefore much of the responsibility falls on the plan sponsor. Pension Advisors bridges the gap between the provider and the plan sponsor by taking the following steps:

  • Review year-end test questionnaires to make sure they are
    completed correctly
  • Ensure correct compensation is being used for testing purposes
  • Review the identification of the HCE’s
  • Thoroughly review census data to make sure it is accurate
  • Challenge the provider on the testing methodology used
  • Determine if the testing method is still applicable
  • Identify shortfalls to create participant education programs
  • Analyze plan design options

Common mistakes we have found are bad census data and providers not utilizing the IRS statutory exclusions. These two things alone can change a test result from a “fail” to a “pass”.  Also, plan demographics change over time so plan sponsors must review their plan designs to see if they still make sense. Sometimes using a Top Paid Group definition to determine HCE’s for testing can provide better outcomes. Year-end testing becomes routine and sponsors sometimes just accept a failed test.  Pension Advisors explores all options to improve the current and future results.


Learn more about 401(k) compliance and discrimination testing by calling us at 877-595-0833 or filling out the form below.

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