Go beyond a basic 401(k)

Go beyond a basic 401(k)

Give your employees more than just a 401(k), join the movement.


401(K) Compliance Testing: How to Keep Your 401(k) ERISA Compliant

April 5, 2017
2 min read
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“Testing” – even for those years out of school, the mere mention of the word can trigger a twinge of anxiety. While days of filling in Scantron bubbles may be well behind them, 401(K) plan sponsors still need to be aware of the yearly 401(K) compliance tests the Internal Revenue Service (IRS) requires.

If you already work with ForUsAll, you’ve likely already spoken with a Financial Advisor regarding your 401(k)’s compliance testing. If you’re here for a refresher, or are just getting started, read on!

What is annual 401(K) compliance testing?

The IRS has a variety of methods it uses to ensure that everyone is benefiting equally from the 401(K) their company offers. That means the plan isn’t unfairly favoring “highly compensated employees” (HCEs). An HCE is defined as an employee that earns more than $120,000 per year or owns more than a 5% stake in the company. The testing also ensures employees stay within certain relative contribution rates.

If you are a ForUsAll customer, we will run compliance checks on your plan. If ForUsAll determines there are an adequate number of non-highly compensated employees (NHCEs) participating, we’ll perform a few tests to verify the plan is inclusive. These include:

The Annual Deferral Percentage (ADP) Test

This test compares the contribution percentages (both pre- and post-tax) of HCEs and NHCEs to make sure everyone is benefitting from the retirement plan equally.

And the Annual Contribution Percentage (ACP) Test

The ACP test, while similar to the ADP, measures the average of matching contributions to after-tax contributions of HCEs and NHCEs.

So, what can your company expect from ForUsAll during the process?

We’ll handle all the heavy legwork, calculating the annual contribution rates of employees using payroll data, and crunching the numbers to compare them against the target. We’ll also perform top-heavy testing to make sure the portion of the plan’s account balance held by HCEs does not exceed 60% of the total plan. You can sit back and rest assured that we’ll take a close look and notify you of any concerns.

What happens if your company fails a 401(K) compliance test?

While not ideal, there are remedies that can be taken if you find that your plan has failed one of the IRS’ tests. This includes providing NHCE’s a bonus contribution called a Qualified Non-Elective Contribution in order to raise average contribution rates. Alternatively, HCE’s may be exempt from participating in the 401(K) during the next plan year. Of course, if you are a client, ForUsAll will provide individual advice regarding a company’s options on a case-by-case basis.

If you have any questions about annual compliance testing, or would like more information about how ForUsAll helps small and medium-sized business outsource their administrative burden of managing their company’s 401(k), call us at 844-401-2253 or schedule a time to chat!

Go beyond a basic 401(k)
Go beyond a basic 401(k)

Give your employees more than just a 401(k), join the movement.

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David Ramirez - CEO at ForUsAll
Wil Curiel

Go beyond a basic 401(k)

Give your employees more than just a 401(k), join the movement.

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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.