Baden Retirement Plan Services is an independent third party administrator (TPA) that performs required compliance testing and non-discrimination testing for tax qualified defined contribution plans, such as 401(k) plans, to help ensure that plans sponsors are following the rules and laws set forth by the Internal Revenue Service (IRS) and the Department of Labor. The compliance tests help verify that funds are being allocated properly and in a timely manner. The non-discrimination tests help ensure that all eligible employees in a company have been afforded the same opportunity to participate in the plan. The consequences for plans sponsors that are not in compliance, intentionally or not, are severe and could include heavy civil or criminal penalties imposed by the IRS or the DOL.
Required compliance and non-discrimination tests:
- ADP/ACP or Actual Deferral Percentage Test / Actual Contribution Percentage Test
- 410(b) or Internal Revenue Code §401(b) Minimum Coverage Requirements
- 415 or Internal Revenue Code §415 Maximum Limits for Qualified Plans
- Top Heavy
- Employer Deductibility
- 402(g) or Internal Revenue Code §401(g) Maximum Elective Deferral Amounts
The ADP test uses mathematical techniques to compare the participation and contribution rates of the highly compensated employees (HCEs) to the nonhighly compensated employees (NHCEs) to determine whether the plan is discriminating in favor of the HCEs.
The ACP test uses the same computation as the ADP test. For this test, the actual contribution ration (ACR), for each participant is calculated by adding his/her matching contributions and employee after tax contributions and dividing the result by his/her salary. The ACRs of all HCEs are then totaled and divided by the number of HCE’s. This calculation is then repeated for the NHCEs.
The 410(b) Minimum Coverage rules require employers to offer their qualified benefit plan to a cross section of employees. For this purpose, each employee of each employer of a Controlled Group or Affiliated Service Group must be considered. A plan must meet either of two specified tests: the Ratio Percentage Test, or the Average Benefits test.
Internal Revenue Code §415 limits the amount of annual additions which may be contributed to an individual’s account(s) in all defined contribution plans maintained by the employer in any one year. The limits are related to the cost of living adjustments (COLAs) announced annually by the Internal Revenue Service.
The top-heavy test looks at the degree to which higher-paid employees' money dominates the 401(k) plan.
The employer deductibility test verifies whether the amount deductible for a taxable year does not exceed a specific percentage of the total aggregate compensation paid to participating employees in the taxable year.
Internal Revenue Code 402(g) limits the amount of elective deferrals to a plan in any year. The deferred amount is calculated based on an employee’s salary, years of service and prior tax deferrals. However, regardless of the calculation results, tax-deferred contributions generally cannot exceed an amount specified by the Internal Revenue Service.