#3
High Risk
Failure to do Discrimination Testing
All plans need to be tested annually to determine whether contributions discriminate in favor of highly compensated employees.
- Potential Consequences
- Plan disqualification
- Corrective distributions
- IRS penalties
- Lost tax benefits
- Prevention Tips
- Monitor HCE vs NHCE participation rates monthly
- Implement automatic enrollment features
- Consider safe harbor plan designs
- Provide targeted education to NHCEs
- Plan corrective actions before year-end
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It is not out of the question that Discrimination Testing may uncover opportunities for increased contributions for Owners and Highly Compensated Employees.
All plans need to be tested annually to determine whether the contributions made under the plan discriminate in favor of highly compensated employees (HCE’s). The Actual Deferral Percentage and the Actual contribution percentage, as well as other tests assure that the plan does not overly favor HCE’s when compared to non-HCE’s.
Plans often fail these tests because of the higher participation rates and greater deferral amounts of the HCE’s.
When a plan fails these tests, corrective action is required immediately in order to maintain the plans qualified status.
"Never cut a tree down in the wintertime. Never make a negative decision in the low time. Never make your most important decisions when you are in your worst moods. Wait. Be patient. The storm will pass. The spring will come."
— Robert H. Schuller
