401(k) compliance testing refers to the process of evaluating a 401(k) plan to ensure that it meets certain requirements established by the Internal Revenue Service (IRS) and the Employee Retirement Income Security Act (ERISA). These tests help ensure that the plan operates in accordance with applicable regulations and does not unfairly benefit highly compensated employees over non-highly compensated employees.

Here are some key types of compliance testing conducted for 401(k) plans:

1. Non-Discrimination Testing: Non-discrimination testing is performed to ensure that a 401(k) plan does not favor highly compensated employees (HCEs) in terms of contributions or benefits. The two primary tests are the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test.

· ADP Test: The ADP test compares the average deferral percentage of HCEs to that of non-HCEs. If the difference exceeds certain limits set by the IRS, corrective actions may be required, such as returning excess contributions to highly compensated employees or implementing a Qualified Non-Elective Contribution (QNEC) to increase non-highly compensated employee participation.

· ACP Test: The ACP test examines the employer matching and after-tax contributions made on behalf of HCEs compared to those made for non-HCEs. Similarly, if the disparity exceeds specified thresholds, corrective measures may be necessary.

2. Top-Heavy Testing: Top-heavy testing ensures that a 401(k) plan is not excessively skewed toward key employees. A plan is considered top-heavy if the total account balances of key employees exceed 60% of the plan’s total account balances. If the plan is top-heavy, minimum contributions or accelerated vesting requirements may be necessary for non-key employees.

3. Contribution Limits: Compliance testing verifies that contributions made to a 401(k) plan adhere to annual contribution limits established by the IRS. This includes limits on employee salary deferrals, catch-up contributions for participants aged 50 and older, and employer contributions.

4. Coverage Testing: Coverage testing determines if a sufficient number of employees are eligible to participate in the 401(k) plan. Plans must meet certain requirements to ensure a broad-based participation, including the availability of the plan to non-highly compensated employees and meeting minimum participation standards.

5. Annual Reporting: In addition to testing, 401(k) plans are required to file annual reports (Form 5500) with the IRS and the Department of Labor (DOL). These reports provide detailed information about the plan’s operations, contributions, investments, and participant demographics.

Proper compliance testing is essential for 401(k) plans to maintain their qualified status, retain favorable tax treatment, and ensure fairness and equal access for all eligible employees. Plan sponsors typically

work closely with third-party administrators, ERISA consultants, or retirement plan providers to perform the necessary compliance tests and address any issues that may arise.