Why It Matters

Many 401(k) plans must complete annual nondiscrimination testing to help ensure the plan does not disproportionately benefit highly compensated employees. Testing outcomes can affect contribution limits, corrective distributions, and employer contributions.

Reviewing preliminary data before year-end may help employers and their plan administrators plan ahead.

Practical Ideas to Consider

✓ Review ADP/ACP testing projections. Ask your plan administrator whether preliminary testing is appropriate. These tests generally compare employee deferrals and matching or after-tax contributions for highly compensated and non-highly compensated employees.

✓ Understand your safe harbor provisions. Certain safe harbor designs can satisfy applicable ADP/ACP testing requirements if their conditions are met. Review existing provisions, notices, and any proposed changes with your administrator, since deadlines and requirements vary.

✓ Evaluate owner contribution goals. Consider how testing results, plan provisions, and annual IRS limits may affect contributions for owners and other highly compensated employees. Additional employer contributions or plan design changes may be worth discussing.

✓ Confirm data and deadlines. Check payroll and census information, compensation definitions, employee classifications, and required notices. Coordinate with your recordkeeper and third-party administrator on the timeline for testing and any corrections.

A Common Mistake We See

Waiting until after year-end to look at testing results can limit available planning options. Early coordination with your payroll team and plan administrator may make the process more manageable.

A Simple Takeaway

👉  A year-end testing checkup can help you make informed decisions, address potential issues sooner, and prepare for a smoother start to the new year.

The Guardian 401(k) Advantage is a monthly newsletter that answers key questions and delivers practical ideas to help you make informed decisions, support your employees, and stay compliant.