Navigating the complexities of compliance testing in 401(k) plans is a pivotal aspect of ensuring the financial well-being and regulatory adherence of these retirement savings vehicles. As stewards of these plans, plan administrators should understand the intricacies of various compliance tests. Here is an overview of four different types of testing you may see in your employee benefit plan audit.
1. ADP and ACP Testing
Actual Deferral Percentage (ADP) testing checks if highly compensated employees (HCEs) contribute within limits relative to non-highly compensated employees (NHCEs). Similarly, Actual Contribution Percentage (ACP) testing evaluates employer-matching contributions and voluntary after-tax contributions. Understanding the nuances of these tests helps plan administrators ensure a fair and equitable distribution of benefits.
2. Top-Heavy Testing
Top-heavy testing ensures that plans don’t overly favor key employees. For administrators, this means verifying that the plan benefits all employees proportionally. Keeping an eye on the plan’s overall structure and implementing measures to address top-heavy concerns ensures regulatory compliance.
3. Coverage Testing
Coverage testing aims to guarantee that a diverse group of employees benefits from the plan. For administrators, this involves assessing whether non-highly compensated employees are adequately included. Ensuring inclusivity in plan participation is key to passing coverage tests and maintaining compliance.
4. Minimum Distribution Requirement
As participants age, the Minimum Distribution Requirement (MDR) comes into play. Administrators should implement streamlined processes to ensure participants receive their required minimum distributions. Staying organized and communicating effectively with participants is crucial to meet these regulatory obligations.
5. Form 5500 Filing
While not a test, Form 5500 filing is an essential annual requirement. Administrators should maintain a comprehensive checklist to ensure accurate and timely submission. Regularly reviewing the filing process and staying informed about changes in reporting requirements is vital to a smooth filing experience.
Plan administrators are pivotal in the success of 401(k) plans. By simplifying the understanding of compliance testing and implementing streamlined processes, administrators can ensure the plans’ financial integrity, meet regulatory requirements, and ultimately provide participants with a secure and well-managed retirement savings experience. Stay informed, stay proactive, and navigate compliance testing with confidence.
This article was co-authored by Marisa Ahrens, CPA.
