© 2019 United Benefit Pensions Inc.

401(k) NON-DISCRIMINATION TESTING

Stay Compliant

Does your company’s 401(k) plan benefit all your employees, or does it favor owners and executives who make more money? That’s what the two major 401(k) nondiscrimination tests try to assess each year.

What do you need to do to pass the tests? Well, our friends at the IRS have made that piece of the equation a little more complex, so let’s take a closer look at a few of the nondiscrimination test. 

What are the nondiscrimination tests?

To give everyone an opportunity to save for the future, a 401(k) plan can’t favor highly compensated employees (HCEs) or key employees (such as owners). Nondiscrimination tests make sure everything is fair by looking at how much of their income different employees defer, how much the company contributes to employee accounts, and what percentage of assets in the plan belong to the HCEs and key employees. 

 

There are two annual nondiscrimination tests a 401(k) sponsor must pass:

  • The Actual Deferral Percentage (ADP) test – 2% “spread test” for deferrals

  • The Actual Contribution Percentage (ACP) test – similar test for matching contributions

Top-Heavy Test

The third compliance test a plan must pass, the top-heavy test, is a little different from ACP and ADP because it focuses on “key employees” within an organization, rather than HCEs. A Plan is Top-Heavy if 60% or more of the assets belong to Key Employees.

Key employees are defined by the IRS as:

  • An officer making over $175,000 in the plan year, OR

  • Anyone who owns more than 5% of the business (including certain family members via attribution rules), OR

  • An employee owning more than 1% of the business (including certain family members via attribution rules) and making over $150,000 for the plan year.


If more than 60% of the assets belong to Key Employees, the Plan is Top-Heavy and is required to make a 3% contribution to all non-key employees unless they have a Safe Harbor Plan.

If a Plan is failing these test, UB Pensions can work with the advisor and Plan Sponsor seeking alternatives for the optimum results.