- Annual 401(k) and 401(m) testing, (ADP / ACP test)
- Annual 401(a)(4) testing (nondiscrimination test)
- Annual 410 (b) (coverage testing)
- Annual 415 testing, maximum plan level limits test
- Annual 402 (g) testing
- Annual 416 testing, top-heavy test
- Maintain participant vesting for employer contributions
- Assistance with participant distributions and loans
- Forfeiture reallocation
- Preparation of Annual Safe Harbor Notice
- Calculation of ADP/ACP Refund Amounts
- Prepare signature ready IRS Form 5500
- Document Maintenance
Elective deferrals made under section 401(k) of the Internal Revenue Code are subject to a nondiscrimination test known as the “actual deferral percentage” (“ADP”) test. The ADP test compares the average deferral rates of the “non-highly compensated employees” (“NHCEs”) to the average deferral rates of the “highly compensated employees” (“HCEs”). All employees eligible to defer a portion of their compensation during any part of the plan year are included in the test.
Employer matching contributions, reallocated match forfeitures, and employee after-tax contributions (collectively referred to as “Matching Contributions”) made in relation to section 401(m) of the Internal Revenue Code are subject to a nondiscrimination test known as the “actual contribution percentage” (“ACP”) test. The ACP test compares the average rate of Matching Contributions received by the “non-highly compensated employees” (“NHCEs”) to the average rate of Matching Contributions received by the “highly compensated employees” (“HCEs”). All employees who were eligible to receive Matching Contributions under the plan are included in the test.
Section 401(a)(4) of the Internal Revenue Code provides that a plan is considered tax-qualified only if the contributions and benefits provided under the plan do not discriminate in favor of highly compensated employees. The regulations for section 401(a)(4) set forth three general requirements in order to satisfy this condition:
- The contributions or benefits provided under the plan must be nondiscriminatory in amount;
- The “benefits, rights, and features” provided under the plan must be made available to employees in a nondiscriminatory manner; and
- The aggregate impact of certain plan events (e.g., plan amendments, recognition of past service credit, and plan terminations) must be nondiscriminatory.
The plan must pass the “coverage” test each year in relation to each type of contribution made to the plan. Although there is more than one way to satisfy this requirement, it generally is satisfied through the performance of the “ratio percentage” test. In general, the ratio percentage test requires that the percentage of “non-highly compensated employees” (“NHCEs”) who benefit from the plan must equal at least 70 percent of the percentage of “highly compensated employees” (“HCEs”) who benefit from the plan.
Section 415 of the Internal Revenue Code establishes the maximum contribution and benefit amounts that a participant may receive from a defined contribution and defined benefit plan, respectively. The limits vary each year and are subject to annual “cost of living” adjustments by the Internal Revenue Service.
Section 402(g) of the Internal Revenue Code limits the amount of 401(k) elective deferrals a participant can contribute during the calendar year. This limit is an individual limit that applies to all plans in which an employee participates (even if not maintained by the same employer). The limit varies each year and is subject to annual “cost of living” adjustments by the Internal Revenue Service. Any amounts in excess of the maximum dollar amount established by this limit must be distributed to the participant and reported as taxable income in the year distributed. If excess deferrals are not returned by April 15, the employee is taxed twice on the excess deferrals. The excess deferrals must be included in the employee’s income for the deferral year and again for the distribution year.
A plan is “top heavy” if, as of the “determination date”, the value of the “key” employees’ accrued benefits divided by the value of all employees’ accrued benefits exceeds 60 percent. In general, the determination date is the last day of the previous plan year. If a plan is top heavy, “non-key” employees may need to receive certain minimum contributions and an accelerated vesting schedule may be required.
In the event that participant vesting is not maintained by the “recordkeeper”, Legacy can be engaged to calculate the vested percentage of each participant’s employer contributions.
Legacy can be retained to assist the plan administrator and participants with regard to the loan / distribution process.
Forfeitures often result when a participant who is not fully vested in his or her employer contributions terminates service with the plan sponsor. Forfeiture reallocation is the redistribution of such unvested amounts among the remaining eligible employees of the plan and is comparable to a profit sharing or matching contribution allocation. The manner in which such amounts may be reallocated, if at all, is dictated by the terms of the plan document. Legacy can perform this service by determining who is eligible to receive a portion of such forfeiture and in what amount.
In the event a plan’s design triggers the obligation to supply its participants with annual notices (Safe Harbor, Automatic Enrollment, Qualified Default Investment Alternative (“QDIA”), etc.), Legacy can be retained to prepare the necessary notices for their distribution by the plan sponsor.
When a plan fails the “actual deferral percentage” (“ADP”) test and/or “actual contribution percentage” (“ACP”) test, a corrective distribution or forfeiture may be necessary in order to bring the plan back into compliance. Legacy can be retained to determine the proper distribution and/or forfeiture amounts including to whom each such distribution and/or forfeiture should be applied.
The Department of Labor, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation jointly developed the Form 5500 Series in order to allow plan sponsors to satisfy the annual employee benefit plan reporting requirements under Title I and Title IV of the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code. The Form 5500 series is intended to ensure that employee benefit plans are operated and managed in accordance with certain prescribed standards and that participants, beneficiaries and regulators have access to the information necessary to protect the rights and benefits of such participants and beneficiaries.
Legacy can prepare this form for the review and signature of the plan administrator and plan sponsor.
This service supplies a plan sponsor with any and all mandatory statutory or regulatory amendments in relation to a Legacy prepared, IRS pre-approved plan document (Prototype or Volume Submitter) at no additional charge. Also included are up to two (2) elective amendments per calendar year as long as the amendments do not require a change from the current “type” of plan document (Ex., Standardized Prototype to Non-Standardized Prototype). Elective amendments that exceed this annual limit or that require a different plan document type may be subject to an additional charge on an individually quoted basis. Note, any IRS mandated full restatements of your document will be subject to an additional charge. Please note that this service must be stated in your service agreement to apply.
Please be advised that not all of Legacy’s clients subscribe to all of the services discussed on this page. Therefore, each Legacy client should refer to its own custom service agreement in order to determine which services it has engaged Legacy to perform.