401(k) Rescue, the Ekon Benefits 401(k) Fix-It Series, describes the most common 401(k) mistakes as determined by the IRS. We provide explanations of common mistakes, suggested prevention techniques and recommendations on correction methods.

Common Mistake #5: Failing Nondiscrimination Testing

Each year, 401(k) plans that are not designated as Safe Harbor plans, must successfully pass Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) nondiscrimination tests to ensure the plan does not disproportionately benefit owners and highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).

Key Components of ADP/ACP Testing

1. Identifying the HCE Group: This group includes employees who meet any of the following criteria:
   • Earn over a set dollar amount in a given year
   • Own more than 5% of the business
   • Certain family members of 5% owners, regardless of compensation
2. ADP Test: This test compares the ratio of elective deferrals to compensation for HCEs vs. NHCEs to ensure HCEs are not deferring excessively.
3. ACP Test: This test compares the ratio of matching contributions to compensation to ensure that HCEs are not receiving disproportionately higher matching contributions.

Your Plan Document will specify whether Current-Year or Prior-Year Testing is to be used. This choice can be changed, but only under specific circumstances.

Corrective Action for Failing Nondiscrimination Testing

When a plan fails the ADP or ACP tests, corrective actions must be taken by the 2 1/2 month deadline to avoid excise taxes, including:

• Providing corrective distributions or refunds to certain participants
• Contributing Qualified Nonelective Contributions (QNECs)

If more than 12 months have passed since the end of the plan year, corrections should be made through the IRS Employee Plans Compliance Resolution System (EPCRS).

Preventing Nondiscrimination Testing Failures

Frequent failures of nondiscrimination testing often lead to the implementation of Safe Harbor provisions or rules that limit contributions for HCEs. To prevent issues:

• Project testing: Forecast the likelihood of refunded contributions
• Ensure your service providers have all the necessary data to complete testing promptly after the Plan year ends

Timely corrections are essential to avoid penalties and maintain plan compliance.

For a complete listing of the most common 401(k) mistakes, please visit the IRS 401(k) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.