If your 401(k) plan runs on a calendar year, now is the time of year when plan sponsors gather employee census data to their 401(k) plan provider or third party administrator (TPA) for annual plan discrimination testing. The IRS requires that these plans be tested to ensure that highly compensated employees are not getting a greater tax break than those who are not highly compensated. This testing enforces the highly compensated employee 401(k) limit.
For the year 2014, the definition of a highly compensated employee is anyone
- who is an individual who owned more than 5% in the business at any time during the year or the preceding year. This is regardless of how much compensation was paid.
- received compensation for the business in the preceding year of 2013 or 2014 of $115,000, or $120,000 if the preceding year is 2015. Also if the employer ranks the employee in the top 20% of employees when ranked by compensation.
The discrimination tests must be completed by March 15th of each year. If your plan does NOT pass a test, the plan may have to refund some of the tax deferred money to highly compensated employees as taxable income.
If you have a SIMPLE plan or a Safe Harbor plan, you can relax, as your tests automatically pass because of the amount of money your company contributes to the participants’ accounts.
Employee census information is needed to conduct the tests. The tests include ALL employees with earnings the past year, even if they did not participate in the 401(k) plan, or were not employed long enough to be eligible.
Your payroll software should contain the information needed for the census. Each provider has their own data requirements, but the basic info needed would be:
- Employee Name
- Social Security Number
- Dates (Hire, Birth, Termination, Rehire)
- Compensation (Gross, Plan Defined Comp which may exclude certain types of pay)
- Salary Deferral Amount
- Company Contribution Amount
The IRS offers a 401k Plan Fix-It Guide for employers with common 401k mistakes.
This article updated from original post date of 1/19/2011