What is the general nondiscrimination test?
According to Ouellette, Employee Retirement Income Security Act (ERISA) Section 401(a)(4)—or general nondiscrimination—testing measures the fairness of non-elective contributions made to HCEs versus NHCEs. This allows a greater portion of the profit sharing allocation to go to those closer to retirement.
What are minimum coverage tests for qualified retirement plans?
The minimum coverage test is one of several nondiscrimination tests a plan must satisfy in order to remain compliant with IRS rules. There are two versions of the test: the ratio percentage test and the average benefits test.
What are the 401k tests?
What is a 401k discrimination testing? The Federal Government issues nondiscrimination tests to evaluate the benefits plans of highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). These tests are meant to confirm NHCEs are not being excluded from the same benefits that HCEs receive.
What is the 401k gateway test?
Under the gateway test, the lowest permissible allocation rate for any non-HCE is one-third of the highest allocation rate for any HCE who benefits. However, as long as each non-HCE receives an allocation of at least 5% of compensation, the gateway is deemed satisfied.
Do safe harbor plans require coverage testing?
Is a safe harbor 401(k) plan always exempt from top-heavy testing? No. A safe harbor 401(k) plan would be subject to top-heavy testing for plan years in which one or more of the following events occur: Safe harbor contributions are subject to longer eligibility requirements than employee deferrals.
What happens if a plan fails coverage testing?
A failure of Section 410(b) coverage testing is a qualification failure under the Internal Revenue Code that could result in the Internal Revenue Service “disqualifying” the plan (i.e., removing the plan’s tax-favored status and taxing all monies contributed to the plan).
How do I fix a failed coverage test?
To correct a failed coverage test, you must adopt a corrective amendment, up to 9½ months following the close of the plan year in which the failure occurred, to retroactively expand plan coverage.
What is 401 A 4 testing?
Section 401(a)(4) contains the test for nondiscrimination that a qualified plan must satisfy. The purpose of this test is to assure that the benefits provided to highly compensated employees are proportional to those provided to nonhighly compensated employees.
What is the minimum gateway?
The gateway minimum contribution made to all plan non-HCEs must equal the lesser of: one-third the highest contribution rate given to any HCE (based on the plan’s definition of compensation) 5% of the participant’s gross compensation.
What testing is required for safe harbor plans?
Annual Non-Discrimination Testing (ADP/ACP) – The ADP and ACP tests compare the average rates of deferral and matching contributions of HCEs to non-HCEs. If your plan has opted for a safe harbor election in any given year, it automatically satisfies the ADP and ACP testing.