What is 401k coverage testing?

The IRS created the coverage test under Internal Revenue Code Section 410(b) to make sure 401(k) and other qualified retirement plans cover a fair cross-section of employees. To make this assessment, the test looks at the employees who are eligible to participate in the plan compared with those who aren’t.

What is top heavy testing for 401k?

A plan is top-heavy when the owners and most highly paid employees (“key employees”) own more than 60% of the value of the plan assets. This ratio is tested every year based on the account balances on the last day of the prior plan year.

Do you need a TPA for a 401k?

As a 401k plan sponsor, you need a TPA to handle the day-to-day administration of your plan. You’re dependent on your TPA for processing of transactions, allocating contributions to participants, completing compliance testing, and preparing Form 5500.

What is 401k nondiscrimination testing?

Nondiscrimination tests for 401(k) plans are primarily concerned with a certain group of employees—highly compensated employees (HCEs)—and whether they’re receiving an unfair share of a plan’s benefits, rights, and features.

What is minimum coverage test 401k?

As long as the ratio percentage for the plan is at least 70% (that magic number we mentioned at the beginning of the article), the plan passes the minimum coverage test. Since the plan’s ratio percentage is 70% or greater, this plan passes the minimum coverage test.

What is 401 A 4 a test?

Section 401(a)(4) contains the test for nondiscrimination that a qualified plan must satisfy. The purpose of this test is to assure that the benefits provided to highly compensated employees are proportional to those provided to nonhighly compensated employees.

What happens if you fail the top-heavy test?

The Problem If the plan is top-heavy for a given year, the minimum benefits and vesting must be given for that year. The failure to properly follow the top-heavy rules can cause the plan to lose its qualified status.

What is the 410 B coverage test?

1) 410(b) coverage testing is a “counting” form of testing, where you are basically comparing the ratio of the number of HCE’s who benefit under the plan to the total number of statutorily eligible HCEs, to a similar ratio for everyone else (who,, by process of elimination, are known as Non-highly Compensated Employees …

Who is the record keeper for a 401k?

As you can tell, at its most basic definition, a 401(k) recordkeeper is the retirement plan’s bookkeeper.

Who is the plan administrator of my 401k?

The employer is almost always the plan sponsor. Sometimes an individual, internal board, or appointed group of trustees will serve as the plan administrator. From a risk management standpoint, the employer should not double as both sponsor and administrator.

What is 401 A 4 testing?

What happens if a 401k plan fails to pass the nondiscrimination tests?

Consequences of Nondiscrimination Testing Failure If you don’t, your plan can lose its qualified status. That means that all the tax benefits related to your 401(k) plan would go away, and you and all of your employees could be left with a hefty tax bill.

What is 401 (k) plan coverage testing?

The purpose of this test is to ensure a 401 (k) plan covers a sufficient number of Non-Highly Compensated Employees (NHCEs). If you’re a 401 (k) plan sponsor, you want to understand the basics of coverage testing.

Does your plan pass the minimum coverage test?

Since the plan’s ratio percentage is 70% or greater, this plan passes the minimum coverage test. What Does This Mean? For starters, it means that plan sponsors should be aware that normal changes in their workforce might impact testing.

When is a plan a “single plan” for coverage testing?

In general, the regulations treat a plan as a “single plan” for coverage testing if and only if, on an ongoing basis, all of the plan assets are available to pay benefits to employees who are covered by the plan . . . . Under this general rule, a plan will be considered a single plan (not multiple plans), despite the fact that:

What is the 410 (B) coverage test for 401 (k) plans?

To retain their tax-qualified status, 401 (k) plans must undergo extensive IRS testing each year to prove they don’t discriminate in favor of Highly-Compensated Employees (HCEs). One of these tests is the IRC section 410 (b) “coverage” test.