401k plans are an essential instrument for employees to save for their retirement. Employers act as plan sponsors offering 401k plans to eligible employees and must comply with the Employment Retirement Income Security Act (ERISA) of 1974. Every year, they need to perform 401k plan Compliance Testing so that all eligible workers can have access and an opportunity within their company’s 401(k) plan.

Compliance Testing is an annual audit mandated by ERISA to ensure every participant gets fair treatment under the plan. It ensures that the employer does not favor higher-income employees and helps verify the proper allocation of funds. Employers must regularly undergo nondiscrimination Compliance Testing to avail tax advantages of the 401k retirement plan.

Compliance Testing services are often carried out by plan providers, record keepers, and TPAs on behalf of their clients. Having a technology-proficient partner can ease the Compliance Testing for employers. The 401k plan administration software can ease census preparation and streamline reporting for plan testing.

What is Compliance Testing?

Compliance Testing is performed by running the employer’s data of all eligible employees for the 401k plan through a series of numerical nondiscrimination tests. The tests are conducted every year to review the average benefits of employees under the following categories

  • Highly compensated employees (HCE)
  • Key employees
  • Non-HCE
  • Non-key employees

During the test, the retirement plan service provider must consider all employees eligible to participate in the 401k plan irrespective of them actually participating in it. The plan will clear the test if the spread between the compared groups is within the specified range. In case of a more significant gap, the employer must take corrective actions as recommended by IRS in the 401(k) Plan Fix-It Guide.

401k plan sponsors must essentially clear the following annual nondiscrimination tests:

  • The Actual Deferral Percentage (ADP) Test to analyze income deferred by employees into the plan
  • The Actual Contribution Percentage (ACP) Test toanalyze the contributions employers make to the plan on behalf of eligible employees
  • Top-Heavy Test tocompare participation by critical employees with participation by other employees

All plan sponsors must take the test unless their plan falls into the Safe Harbor exception. However, as the tests follow the tax code requirements set out by the IRS, it is advisable to ensure compliance to avoid tax complications.

Leverage technology for 401k Compliance Testing

Retirement and pension management software vendors help employers manage their paperwork-heavy data processing needs. They replace traditional processes with a compliance module that offers fast calculations and precise report generation. The module integrates with the Plan Document module to offer a wide range of testing options.

The Compliance Testing is enriched with features that ease and automate the testing process. It has a payroll accumulator and helps with distribution processing. The workflow management function helps with monitoring and tracking of plan data. It conducts interactive calculations of refunds and offers suggestions to avoid failing ADP or ACP tests.

Congruent Solutions – the ideal compliance testing partner

Bringing over 17 years of experience in compliance testing and over two decades of expertise in the retirement industry, Congruent is the partner of choice for several leading plan providers. We help our clients to manage the workload while meeting deadlines for the annual tests. Our highly trained associates can help you handle 401k plan Compliance Testing efficiently without any errors, thereby helping you overcome the regulatory hurdles without any stress.

Contact our team today to get the best team for your 401k plan compliance testing needs.

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