Non-Discrimination Testing
Introduction to Non-Discrimination Testing
This is Ellen from Boyum with another Ask an EBP auditor. Welcome to a beautiful day in Minneapolis. I’m just kidding. It’s four degrees outside.
So, today we’re diving into non-compliance testing for 401k plans, including important due dates and best practices to prepare your census for your third-party administrator.
Now, what is non-discrimination testing?
This testing ensures that your 401k plans meet IRS non-discrimination rules.
The rules are called things like ADP, ACP, coverage rules, deferral limits.
Missing these deadlines can trigger excise taxes, or even plan disqualification. And this testing is required for all plans, no matter the plan size.
Important Compliance Deadlines for Calendar Year-End Plans
So, let’s walk through the compliance deadlines that you need to know for calendar year-end plans.
ADP ACP corrective distributions are made by March 15th or 2 and a half months after year end to avoid a 10% excise tax.
This is also the date that best practice your testing should be complete by.
Excess deferrals, also called the 402G limit, you’re supposed to distribute by April 15 to your participants so that they avoid double taxation.
Final corrective actions in your plan can be ready up to 12 months after plan year end to maintain your qualified status and avoid costly IRS corrections.
Preparing Your Employee Census
Now, your service provider who prepares the non-discrimination testing will most likely provide you with a template so they have the data they need for testing.
This data is often referred to as an employee census and an accurate census is critical.
The data you send to your TPA directly affects these tests and their timely completion.
Best Practices for Preparing Census Data
Include every eligible employee. In some cases, you may need to include every employee. Even non-participating folks need to be included. Missing individuals can skew the results.
You need to verify your key fields. Ensure dates of birth, hire and termination dates, your hours, and your annual compensation are correct.
Use the consistent compensation definitions. Now, your template will define what they want you to include in the compensation, whether it’s W2, gross wages, or another metric, so you can avoid miscalculations.
Update the employment status. You need to reflect all terminations, rehires, and leaves of absences accurately.
Coordinate with payroll. Go ahead and get that data directly from the payroll system to minimize errors and ensure that you hit those deadlines and submit the census by mid January.
TPA’s typically ask for census data and questionnaires around January 15th to the 31st so testing can begin promptly.
Importance of Timely and Accurate Data
When your census is timely and accurate, your TPA can complete testing and process corrections ahead of the important deadlines.
This helps you avoid penalties and keeps your plan compliant.
Closing
Thanks for tuning in. Drop your questions about non-compliance testing or 401k audits in the comments.