Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.
Over the next few weeks 401kBasics is going to review the common mistakes that plan sponsors make in administering their plan, how to find the mistake and how to correct the mistake. The fifth common mistake is failure to make sure plan has satisfied the 401(k) nondiscrimination tests (ADP and ACP).
- How to Find the Mistake: Independent review to determine if highly compensated and nonhighly compensated employees are properly classified.
- How to Fix the Mistake: Correction method for ADP/ACP test failures – Make qualified nonelective contributions (QNECs) on behalf on the nonhighly compensated employees. One-to-one correction method. The correction programs available include SCP, VCP and Audit CAP, depending upon the situation.
This mistake can be avoided in the future by considering a safe harbor plan. Communicate with the plan administrator to ensure proper employee classification and make sure the plan administrators are familiar with the terms of the plan. For more information please refer to potential mistake number 5 on the IRS 401(k) Fix-It Guide.
This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.