Make Sure Your 401(k) Plan is in Compliance

By now, you should have completed requests from your third-party administrator (TPA) regarding employee census data, including dates of birth, dates of hire, number of hours worked last year, and compensation. As required by the Department of Labor, the information is used to run non-discrimination testing on your qualified plans to ensure all eligible participants in your 401(k) plan are being treated fairly.

Typically, failed tests result in deferrals that must be returned to highly compensated employees (HCE). If refunds are not made, a qualified non-elective contribution is required for all non-HCEs. Such deferrals can be significantly higher than the refunds required to get a plan back in compliance.

Plans need to be in compliance by March 15 of each year. This includes distributing any necessary refunds.

You can help avoid a failed test by reviewing and modifying specific criteria within your plan document. For example, restaurant companies often have high rates of employee turnover. Modifying the eligibility requirements of your plan can help with this scenario while maximizing HCE benefits.

Another consideration would be to elect the “safe harbor” plan option. This option comes with benefits and drawbacks. The key benefit is that failed tests are no longer an issue and your HCEs are able to maximize their allowable contribution to the plan. To learn more about safe harbor plans, contact a BDO professional.