Mid-Year Testing

By Anthony L. Scialabba IV, Esq., QKA

Worried your Plan may not pass 401k nondiscrimination testing? 

 

Using Mid-year Discrimination Testing to Avoid Nondiscrimination Testing Failures

 

Is it likely that your plan will fail nondiscrimination this year?  Have you typically had to refund your Highly Compensated Employees (HCEs) in prior years due to failed nondiscrimination testing?  If so, you can take steps to help ensure that the tests will be satisfied.

 

This can be accomplished through the utilization of “mid-year” testing.  Mid-year testing annualizes the first half of the years’ data to provide employers the limits in connection with the nondiscrimination tests for the HCEs in advance.  A plan sponsor can then advise affected HCEs to reduce the amount of elective deferral contributions to minimize their refunds.

 

The staff at RetireWell Administrators, Inc. is knowledgeable regarding how to perform mid-year nondiscrimination testing.  If you would like to discuss or pursue “mid-year” testing, please contact your plan administrator or clientservices@retirewelltpa.com.

 

Looking for a longer-term solution to participant taxable refunds?

 

Consider Amending your Plan to a Safe Harbor Plan to Avoid Nondiscrimination Testing Failures Altogether

 

Prior to December 1, 2022, you may amend your plan to add a 3% Safe Harbor NonElective contribution feature which is a 3% contribution that is received by all eligible employees regardless of whether they defer or not and would be based on calendar year compensation for 2022.

 

Another alternative would be to amend the plan prior to December 1, 2022 to add a Safe Harbor Match contribution feature effective January 1, 2023.  The formula is 100% match on the first 3% of elective deferrals plus an additional 50% match on the next 2% of elective deferrals for a maximum match of 4%.

 

Although a Safe Harbor plan design eliminates ADP/ACP nondiscrimination testing and allows for HCEs to maximize their contributions without concern that they will be refunded, this type of design is not for every plan sponsor.  First, although these employer contributions encourage employee participation in the plan, the contributions are mandatory which could potentially increase the cost to the employer.  However, the contributions are tax-deductible which could possibly be a huge benefit to the employer.  Secondly, these contributions cannot be subject to a vesting schedule and are immediately 100% vested.

 

Please reach out to your Senior Retirement Specialist at RetireWell or email clientservices@retirewelltpa.com if you wish to discuss Safe Harbor contribution provisions as they relate to your Plan and your organization’s overall strategy and goals.