The Top Ten Things to Do If Your
401(k) Plan Fails Nondiscrimination Testing
401(k) plan sponsors generally do not relish the annual call from their
401(k) consultant with their plan's nondiscrimination testing results. If your plan regularly passes testing, that's great news. However, if you are not so fortunate or your plan is on the cusp, there are steps you can take to greatly increase your plan's chances of success. This article discusses those choices.
- Assess alternate testing methods. A technically savvy retirement plan consultant may be able to get your plan to pass using a testing method different from the one you have customarily used. If your plan just barely passes with an alternate testing method, you most likely will still want to consider making some changes to ensure a better outcome in following years.
- Make any necessary refunds. Once your plan fails the testing, you must take corrective measures to keep your plan qualified – doing so is not optional! Generally, the first step is to reduce the contributions incurred by the highly-compensated participants to the point where the plan will pass the tests. Those highly-compensated employees who defer the most in dollar terms receive refunds first. For 2008 plan year and forward, refund distributions are taxable in the year in which they are made.
This, of course, creates communications issues with the higher-paid employees. If the failure appears to have been an aberration, you may be able to treat it as such. If it appears to be part of a trend, you may want to advise affected employees to reduce their deferral percentage to minimize their refund, or to be prepared to receive refunds in future years. Click here for more...
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