Benefit Insights | Automatic Enrollment Is On The Rise Winter 2019
A NON-TECHNICAL REVIEW OF QUALIFIED RETIREMENT PLAN LEGISLATIVE AND ADMINISTRATIVE ISSUES
IT’S TESTING SEASON!
QUALIFIED PLANS MUST PERFORM ANNUAL TESTING TO BE An employee is an HCE if:
SURE THAT THE PLAN DOESN’T UNFAIRLY DISCRIMINATE IN • they own more than 5% of the company (including family
FAVOR OF “HIGHLY COMPENSATED EMPLOYEES” (HCEs) OR
EXCEED THE CONTRIBUTION LIMITS SET FORTH BY THE IRS.
Depending on your plan provisions, it isn’t just one calculation,
but a series of tests that show that your plan is not discriminatory.
If your plan is audited, the auditor is looking for proof of this
compliance.
attribution rules), or
• they received compensation exceeding a threshold set by
the IRS in the prior plan year ($120,000 in 2017 for the 2018
plan year HCE determination).
An employee is a “Key” employee if they meet any of the
following criteria:
Since most retirement plans operate on a calendar year basis,
testing season is now! If a testing failure occurs, correcting the
failure by March 15 th can save the plan sponsor excise taxes
and additional filings. Getting year-end data in early, including
• They own more than 5% of the company (including family
attribution rules).
• They own more than 1% of the company (including family
complete census information, is paramount. Though Rea & attribution rules) and have an annual compensation greater
Associates does all the heavy lifting to ensure your plan passes than $150,000.
the appropriate testing, all plan sponsors should understand
the basics of testing so that they can confirm all tests and any
appropriate corrections are completed each year. The following
are some helpful definitions to get you through the basics of
compliance testing.
• They are an officer of the company and have compensation
of at least $175,000.
WHAT DO THE DIFFERENT COMPLIANCE TESTS MEAN?
ANNUAL NON-DISCRIMINATION TESTING (ADP/ACP) – If your
plan is a 401(k) plan, the ADP and ACP tests are a comparison
IS AN HCE THE SAME AS A KEY EMPLOYEE?
between the average rates of deferral and matching
contributions of HCEs to non-HCEs. Regulations generally
An HCE and a Key employee are two separate definitions used allow for a 2% disparity between the two groups. If your
to test different aspects of a retirement plan. Who qualifies as an plan has opted for a safe harbor election in any given year, it
HCE is determined on an annual basis. automatically satisfies the ADP and ACP testing.
WINTER 2019
BENEFIT INSIGHTS