How to Pass a Discrimination Test and Avoid Angry Executives

Discrimination TestDiscrimination Test

It’s that time of year when you find out if the highly paid executives will be running into your office screaming because the defined contribution (DC) plan failed the discrimination test and the highly paid executives (HCE) will have a higher tax bill. Well at least you have their attention, though for the wrong reasons. A TPA in Mobile, AL, Employee Fiduciary has some practical suggestions on how to pass the dreaded ADP or ACP test.

The March 15th deadline to make corrective changes for failed discrimination tests has come and gone to avoid the 10% IRS excise tax but here are some ways to avoid failures in the future. And though it is cold comfort that 30% of plans subject to ADP/ACP testing fail, it is certainly a red flag.

Ways to avoid failing a discrimination test include:

  • Safe Harbor Plans:
    • Traditional Match – 3% of 100% and 50% of next 2% (4%)
    • Non-elective Match – 3% of 100% whether the eligible participant contributes or not (3%)
    • QACA Match – for plans that auto-enroll, 1% of 100% and 50% of 5% (3.5%
  • Testing Options
    • Limit the classification of HCE to the top 20%
    • Use current year rather than prior year results for testing
    • Allow more liberal eligibility requirements than the law requires and test the participants that meet the plan’s eligibility requirements, but not the legal limits, separately

Another option is to close participation in a plan to job categories that have relatively low participation.

Confused? Overwhelmed? Sick of angry execs in your office that are tired of paying increased taxes? That’s where experienced and credentialed TPAs like Employee Fiduciary can help. Finding a good one may be hard – there are an estimated 4,000 compliance TPAs – so look for one that has accredited credentials from legitimate TPA training organizations like ASPPA.

Leave a Comment

Your email address will not be published. Required fields are marked *

FOLLOW US:

Thank you for visiting our site!

TRAU, Inc. and its affiliates TPSU and 401kTV do not provide investment, legal, tax or accounting advice. 401kTV readers and viewers should consult their legal and tax advisors for guidance. All materials, including but not limited to articles, directories, photos, videos, graphics etc., on this website are the sole property of TRAU, Inc. and are intended for educational purposes only. We do encourage your sharing 401kTV content with Plan Sponsors; however, unauthorized use of any and all materials is prohibited/restricted.

Permission to use any of the materials, etc. on any of this site or affiliate websites may be requested in writing at [email protected] and may be granted in writing on a case by case basis. Use of all editorial content without permission is strictly prohibited.

Scroll to Top