Year End 401k Compliance Review

There are a number of tests that your 401k plan must pass at the end of the year in order to be compliant as a 401k account. Not all 401k accounts must pass these tests, it will differ if it is a Safe Harbor plan or not.

Actual Deferral Percentage Test

Highly compensated employees or HCE employees are owners, or spouses, children, or grandparents of the owners. There may also be a salary limit at which they become an HCE employee, but not sure.

HCE and Non-HCE employees contributions to their 401k must balance out to within a few percentage points. This mean HCE employees can not make 90% of their paycheck into a contribution and have Non-HCE employees only contribute 5%.

This test is remedied in one of three ways.

Refunding money put into the plan by the HCE employees to balance it out amongst the Non-HCE employees is the default. Another option is contributing money from the company to make all contributions equal percentage wise.

The last option is a Targeted QNEC. Its basically a small amount given to the employees 401k plans that are currently eligible. Doing this though could open up accounts that were not originally there and we would then have to pay to maintain that account indefinitely.

We can tell ADP our disbursement income to decrease our contribution percentage Because its what percentage of your gross compensation you are contributing.

In the Year End Test Package around page 31 you can find the Actual Deferral Percentage Targeted QNEC Allocation Report.

Year End Test Package can be found if you login to the administrator 401k account and go to the compliance section.

How to Fix Allocation Percentage

• Click Compliance Testing
• Click Review Employee Data
• Click Show all Employees
• Compensation shows money through payroll, Allocation is the same thing
• Change Gross Compensation and Allocation Compensation to our total gross compensation from Bolt Lighting Rental

Top Heavy Test

When looking at total Assets of the plan, Key Employees(Owners) must have less than 60% of the total dollars in the plan.

This test cannot be resolved and you must pay a penalty until you have either switched plans or your employees or the employer put more money into the plan from the Non key employee side.

It can be found around Page 18 of the Year End Test Package, its called Top Heavy Contribution Non-Key Employees.

Remedy Top Heavy Test

• Print out Page 18 of the Year End Test Package
• Sign it and email it to compliance@adp.com
• Include Plan number in Subject line and in the body a brief explanation of what it is.

Safe Harbor Plan

(150/month + 2.50 for each employee + 20.83/month Fiduciary Responsibility (its good))

The Safe Harbor plan allows owners to put a much larger percentage of their payroll into their 401k. It allows you to not do the Top Heavy Test or the Allocation Defferal Percentage Test. There are two different types of Safe Harbor plans.

Safe Harbor Non-Elective Contribution

For this, HCE and Non-HCE can contribute as much as they want or nothing to their 401k, but the employer must contribute a minimum of 3% of all eligible employees gross compensation to their 401k. This includes bonuses, etc as you cannot exclude any forms of compensation

You are able to change to this mid-year.

Safe Harbor Match

In this Safe Harbor plan again HCE and Non-HCE employees can contribute as much as they want or nothing at all to their 401k. If the employee contributes, the company must offer a match with a minimum of 4% up to 6% as a maximum.

Can’t exclude any forms of compensation and company contribution is 100% immediately vested

Example:

If an employee contributes 2% of their gross income, the employer has set the match to 4%, the employer must match 2% of their gross income into their 401k.

If in the same situation there is another employee who contributes 6% to their 401k, the employer has set their match to 4%, the employer must match 4% of their gross income.

Basically up to 4% you will match whatever they put in, but over the limit you set, you will default to that matching amount, up to a maximum of 6%.

All of these matches are of their gross income, so if the employee is making 100,000 a year and we agree to do a 5% match and they contribute 5%, then the employer would have to put in 5,000.

Employees must be notified they will be switched to this plan.

Safe Harbor Match True-up

This would help them get to the yearly IRS limit no matter their contribution levels. So for example if they only contribute 2% of their gross income, then you would match that and then contribute whatever excess needed to get them to the IRS yearly limit.

Closing Account

If employee is terminated contributions have been made, we will be charged for their account indefinitely unless they fill out Termination Distribution Form - 55 dollars processing fee.

Closing Plan

1700 to terminate the plan, plus you still need to pass all of the testing.

To make someone Un-Eligible

Delete their Eligibility date from the compliance testing path that is used in resolving the Allocation Percentage Defferal Test.

Will need to fill out ineligible contributions form for each ineligible employee.

In ADP this is in Resources > Transfer File

Monthly Check

Login to the ADP Plan Administrator Site

https://www.mykplan.com/sponsorsecure_net/login.aspx

On the side bar, click Employees > View Pending Enrollments > Look in Eligible Section

If you see anyone under this tab, click the blue drop down and select "Always Ineligible", Click Update in the bottom right.

Also look under Excluded and see if there is anyone there you can set to "Always Ineligible"

If you do mark anyone as that, also go into run payroll and make sure their contributions are set to 0%.

• Login to Run Payroll
• Click People, search for that person you made ineligible.
• Click Earnings/Deductions and make sure they either don't have any 401k contribution percentages set and if they do, set it to 0%.

Changing Plans

In order to change plans, you must call them at 800-929-2170