As an HR professional, “March Madness” more likely means failing nondiscrimination tests (ADP/ACP) and scrambling to make refunds or corrections than it does filling out your NCAA basketball tournament brackets!
Most plans correct nondiscrimination failures by refunding excess contributions or excess aggregate contributions (for match) to highly compensated employees (HCEs).
The following are both reactive and proactive measures a plan may take to avoid having to make HCE refunds:
- Qualified Non-Elective Employer Contribution– A qualified non-elective employer contribution (QNEC) is made to non-highly compensated employees (NHCEs) in an amount that raises their collective actual deferral percentage (ADP) to a high enough number to avoid the necessity of refunds to HCEs. The plan document must explicitly allow for use of QNECs. This is REACTIVE.
- Automatic Enrollment – Research shows that ADPs grow radically as a result of automatic enrollment, particularly among NHCEs, thereby allowing greater deferrals by HCEs. This is not a fail-safe, but implementation of automatic enrollment helps with testing numbers. It is important to note that implementation of automatic enrollment usually entails greater cost as the number of participants receiving the match increases. This is PROACTIVE.
- Safe Harbor Match – If a plan adopts a safe harbor design it avoids ADP/ACP testing altogether. If safe harbor match rules are met this is undoubtedly a fail-safe; refunds need not be contemplated. In exchange for this benefit the employer must make either a nonelective contribution to all eligible employees or a specific match to deferring employees. This is PROACTIVE.
- Automatic Safe Harbor – 401k plans implementing this design, requiring employer contributions similar to regular safe harbor design, also avoid ADP/ACP testing and thus HCEs may contribute up to the $15,500 (for 2007) maximum without fear of refunds. This design may be complicated and is effective January 1, 2008. This is PROACTIVE.
If you desire further information regarding these measures, please contact us.Related Topics
- 401k non discrimination testing, hce 401k, 401k HCE, 401k discrimination testing, 401k discrimination testing rules