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401(k) Plans: Submit the Corrective Measures for Contribution Form
401(k) Plans: Any excess contributions and excess aggregate contributions which resulted from a failure of the annual nondiscrimination tests must be distributed by March 15, or your firm will incur a 10% excise tax on the amount of the excess contributions and excess aggregate contributions which were not timely distributed. If your firm’s plan fails the nondiscrimination tests and needs to distribute excess salary deferral contributions to affected participants, you will need to submit the Corrective Measures for Contributions Form to the Program. Plans with an eligible automatic contribution arrangement (an “EACA”) have until June 30 to process these corrective distributions.
More About Nondiscrimination Testing
The Program provides mid-year and year-end nondiscrimination testing upon request for 401(k) plans. Testing is based on information provided by you through the Census and is provided at no additional charge.
Failing the nondiscrimination tests means that your firm’s plan discriminates in favor of highly compensated employees (HCEs). If your firm’s 401(k) plan fails the annual nondiscrimination tests, you will need to submit the Corrective Measures for Contributions Form to the Program or deposit a Qualified Non-Elective Contribution (QNEC), if allowed, based on the testing method selected in your Adoption Agreement or plan document*. The Corrective Measures for Contributions Form will notify the Program about any corrective distributions that will be made to HCEs to correct failed nondiscrimination tests. If required, your firm must distribute excess before-tax and after-tax contributions, as well as investment earnings, to HCEs and forfeit any related matching contributions and investment earnings by March 15. If this distribution isn’t made by this deadline, your firm will owe an excise tax equal to 10% of the contributions required to be distributed. Plans with an
Eligible Automatic Contribution Arrangement (EACA) have until June 30 to issue these corrective distributions.
If you elected in your Adoption Agreement to use the current year method of testing, you may correct the failure by making a QNEC, which must be made by the date on which your firm’s 2020 contributions are due. Avoid failing the nondiscrimination tests by encouraging non-highly compensated employees (NHCEs) to increase or begin making 401(k) elective salary deferrals, by using the prior year method of testing and the mid-year nondiscrimination test as a status check, and by limiting HCE contributions. You may also want to consider amending your plan for 2022 to include a Safe Harbor provision, which would exempt your plan from nondiscrimination testing.
* In some cases, the corrective action may involve reclassifying excess deferrals as catch-up contributions; the Program will notify you if this is an option.