401(k) Plan Nondiscrimination Testing and Compliance: Guidance for Employee Benefits Counsel and Plan Sponsors

The IRS prohibits 401(k) plans from discriminating in favor of highly compensated employees and requires plan sponsors to conduct yearly nondiscrimination testing to ensure that contributions made by non-highly compensated employees or NHCEs are proportional to contributions made by highly compensated employees or HCEs.

Plans that fail nondiscrimination testing may be required to make corrective, taxable distributions to HCEs. In addition, there are certain aspects that must be considered under SECURE 2.0 as such relates to contributions, distributions, and long-term part-time employees. Each year, a large number of company plans fail the nondiscrimination tests, resulting in the return of contributions to HCEs. And some company plans that fail nondiscrimination testing also fail to properly make their corrective distributions.

Companies can avoid 401(k) nondiscrimination testing with safe harbor plans, but they involve strict requirements for companies to make certain minimum contributions to employee accounts. Plan sponsors must carefully weigh the benefits and costs before electing a safe harbor plan design.

Listen as our panel of employee benefits attorneys offers detailed guidance on performing nondiscrimination testing on 401(k) plans. The panel will discuss SECURE 2.0, minimum coverage, ADP and ACP tests for ensuring compliance with IRS nondiscrimination requirements, the benefits and costs of adopting a safe harbor plan design, and the complex legal issues that multiple employer plans present.