According to the Employee Retirement Income Security Act (ERISA), all plan sponsors offering 401k plans must conduct Compliance Testing to ensure all employees eligible to the plan are provided the same opportunity and access to the plan.
The fundamental objective of Compliance Testing is that it makes sure the 401k plan benefits all employees in a just and comparable manner. It does not favor employees with higher income, such as business owners and top executives. It also helps verify that funds are correctly allotted, in a timely manner. These tests are performed by plan service providers such as plan providers, record keepers, and TPAs on behalf of their clients.
Overview of Compliance Testing
Compliance Testing involves a series of numerical nondiscrimination tests that plans must satiate, every year, to preserve tax benefits. The testing primarily reviews the average benefits of highly compensated employees (HCE) and key employees and the non-HCE and non-key employees. If the spread between the two groups is within a particular range, the plan clears the test. If the difference is huge, the company must provide additional benefits to the non-HCE/non-key employees or to reduce benefits to HCE.
Companies must essentially clear the nondiscrimination tests of ADP test, ACP test, and Top Heavy test.
Challenges with Compliance Testing
Compliance Testing has numerous elements, marked with twists and turns, exceptions, and riders. Suffice to say; it is a complicated and cumbersome process that requires a great level of precision and understanding.
During Compliance Testing, a lot of census data has to be handled by companies sponsoring 401k employees. Plan service providers have to make sure all resources in the census are eligible for the 401k process and the data is compliant with the rules and regulations defined by the US government and IRS. The data of all participants is scrutinized, cleaned up, and run through a Compliance Testing software. The software then generates eligibility results to make sure the record-keeping system gives the right output.
While the software does the calculation to generate results, the accuracy of the results depends on the data provided. Hence, administrators handling this testing must know the rules and regulations around 401k, so that they provide appropriate data, fine-tune areas that the software cannot check, and make sure the output generated by the software aligns with what the law says. If not, organizations (plan sponsors) are saddled with hefty penalties for non-compliance.
Being a seasonal activity, Compliance Testing adds to the workload of plan service providers, who have a finite set of administrators handling their core operations. They also cannot afford to hire extra hands for this seasonal task. This scenario is somewhat similar to what happens with the Form 5500 filing process, which is also a seasonal job.
Role of Congruent in Compliance Testing
At this crucial juncture, associating with the right partner can make all the difference. This is where Congruent Solutions comes in. An outsourced plan administration services provider with over 15 years of experience in Compliance Testing processing, Congruent acts as an extended arm for clients providing supplemental bandwidth to manage workload and help them meet deadlines in an efficient and error-free manner.
People who handle 401k Plan Compliance Testing need an accounting background, a passion for numbers, and analytical skills. Congruent carefully chooses people for the job – those with the requisite skills and unique wiring that will help them crack solutions for the challenges posed by the testing process. Then Congruent trains them rigorously in an in-depth manner.
Congruent has experience in processing Compliance Testing on leading technology platforms, delivering high-quality and accurate results.
The firm’s employees work in a sterile and robust infrastructure, with proper systems, checks, and processes in place to ensure data privacy. No data is downloaded or processed on local machines. Employees use a VPN to log into the client’s systems. Congruent has to its credit ISO and SOC (SOC 1 Type II and SOC 2 Type II) certifications, which assure clients of the company’s dedication and commitment to data security and integrity.
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