Today, businesses of any size can easily establish a 401(k) plan that is reasonably priced, simple to implement and requires little time to administer. Offering a 401(k) plan not only helps your employees, it also helps your firm be more competitive in the marketplace.
Traditional 401(k)
A Traditional 401(k) plan allows eligible employees to save in a pre-tax or post-tax (Roth) retirement savings plan. The money grows tax deferred until it is withdrawn. In addition, a Traditional 401(k) plan provides employers with the option to make contributions on behalf of plan participants, such as employer matching or profit sharing contributions.
What are testing requirements?
Traditional 401(k) plans are subject to non-discrimination testing on both annual contributions (ADP testing) and cumulative assets (Top Heavy testing). These tests exist to ensure that plans are set up for the benefit of all employees, not just owners and Highly Compensated Employees.
What is ADP and ACP testing?
To satisfy the non-discrimination requirements, the employer must perform an Actual Deferral Percentage and Actual Contribution Percentage test each year. The testing compares the average employee deferral rate and the average company matching rate of Highly Compensated Employees against Non-Highly Compensated Employees, to ensure there is no discrimination in favor of HCEs.
What is Top Heavy testing?
A plan is Top Heavy for a plan year if, at the end of the preceding year, the total value of account balances of Key Employees was more than 60% of the total value of the plan. If the plan is Top Heavy and is funded by a Key Employee, the employer is required to make a minimum contribution of 3% to all non-key employees who are employed on the last day of the plan year.
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