Why Mid-Year plan testing is so important

Many companies in the United States have implemented 401(k) retirement plans for their employees.  Each year, the IRS not only imposes limits on how much a participant can contribute to their retirement account, but also requires that testing be conducted annually to ensure that highly compensated employees (HCEs) are not benefiting substantially more than non-highly compensated employees (NHCEs).  While testing is only required once a year, Human Resources, Inc. can test your 401(k) plan mid-year to see if you’re on the right track to passing.  Failing a non-discrimination test may result in your owners and managers having their retirement contributions refunded as taxable income.

What is a highly compensated employee?

An HCE is defined as an employee whose annual wages exceed $115,000 per year or an employee who owns at least 5% of the company. The IRS makes adjustments to this wage threshold each year due to inflation.

How does a company pass non-discrimination testing?

The amount of salary deferrals HCEs may make and the amount of matching contributions HCEs may receive is based on the amount of salary deferrals and matching contributions made and received by NHCEs. The averages for the HCE group may not exceed the averages of the NHCE group by more than the specified amount, as shown below:

After Human Resources, Inc. runs the formula that calculates the results of your test and discovers that you’re going to fail, there are steps that your company can take to bring the plan back into compliance before year end.

• Encourage more rank and file employees to participate
• Have HCEs lower their contribution for the remainder of the year

For future years, your company may want to adopt a Safe Harbor Plan and HRI can explain the advantages of this and the steps that must be taken to adopt that plan design.

Contact Human Resources, Inc. 401(k) specialists today!