To meet IRS qualification requirements, 401(k) plans must pass nondiscrimination testing annually to ensure plan contributions do not disproportionately benefit Highly-Compensated Employees (HCEs) or exceed legal limits. While most employers hire a professional third-party administrator (TPA) to complete this work, all employers should understand the deadlines that apply to the process – which generally relate to failed testing and contribution funding. This basic knowledge can help avoid the often painful consequences of late testing – including missed tax deductions, IRS penalties, and plan disqualification.
A competent 401(k) provider will do what they can to get plan testing completed in time to meet all applicable deadlines, but they can’t do it alone – they will need the employer’s help. In general, this help entails timely responses to information requests.
The key 401(k) testing deadlines are summarized below. If you’re an employer, you can use this information to ensure your plan testing is completed in time to meet all applicable deadlines.
Below is a summary of the nondiscrimination tests that may apply to your 401(k) plan, including their correction deadlines. Safe harbor 401(k) plans are usually exempt from the ADP/ACP and top heavy tests. Following the close of each plan year, most 401(k) providers (ourselves included) will prioritize the testing of 401(k) plans subject to the ADP/ACP test first due to the early deadline for correcting a failed test without penalty.
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Name |
Purpose |
Correction (if test fails) |
Correction Deadline |
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Ensure the employee salary deferrals made to the plan do not disproportionally benefit HCEs. |
The most common correction method is distributing excess contributions to HCEs in the amount necessary to make the test pass. |
2½ months following the close of the plan year to avoid a 10% excise tax. Final deadline is 12 months following the close of the plan year |
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Ensure the matching and voluntary contributions made to the plan do not disproportionally benefit HCEs. |
The most common correction method is distributing excess contributions to HCEs in the amount necessary to make the test pass |
2½ months following the close of the plan year to avoid a 10% excise tax. Final deadline is 12 months following the close of the plan year |
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Ensure that “key employees” accounts do not represent a disproportional percentage of plan assets. |
Allocate a 3% top heavy minimum contribution to non-key participants. Other employer contributions can be used to offset the 3% contribution. |
12 months following the close of the plan year in which the plan is top heavy. |
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401(a)(4) General Nondiscrimination Test |
Ensure the profit sharing and matching contributions that do not meet a design-based safe harbor allocation formula (e.g., a new comparability contribution) do not disproportionally benefit HCEs. |
Failing this test is not an option. Either non-HCE contribution rates are increased until the test passes. Using a design-based safe harbor allocation formula (e.g., pro rata or integrated) is the last resort. |
Filing deadline for the employer’s federal tax return, including extensions. |
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Ensure that each contribution made to the plan (e.g., salary deferrals, safe harbor, profit sharing) benefits a sufficient percentage of non-HCEs. |
Retroactively amend the plan to benefit more non-HCEs until the test passes. |
9½ months following the close of the plan year in which the failure occurred. |
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Limits the amount of elective deferrals a plan participant may exclude from taxable income each calendar year. |
Distribute the excess contribution amount. |
April 15th following the close of the calendar year during which the excess deferral was made. |
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Limits the total contributions that can be credited to a plan participant’s account each limitation year (usually the plan year) |
Distribute the excess contribution amount. |
9½ months following the close of the limitation year in which the failure occurred. |
*A safe harbor 401(k) plan is generally exempt from these tests.
If you plan to fund an employer contribution following the close of the year, you need to keep two contribution deadlines in mind – one for deductibility and another for “annual additions.” These deadlines will depend upon your company’s tax status and the type of contribution to be made.
To deduct an employer contribution for a given tax year, you must fund it no later than the due date of your company’s federal tax return, including extensions. Below is a summary of the filing deadlines for calendar year tax filers:
|
Tax Status |
Filing Deadline |
Extended Deadline |
|
C-Corporation (or LLC taxed as C-Corp) |
April 15 |
October 15 |
|
S-Corporation (or LLC taxed as S-Corp) |
March 15 |
September 15 |
|
Partnership (or LLC taxed as a part) |
March 15 |
September 15 |
|
Sole Proprietorship (or LLC taxed as sole prop) |
April 15 |
October 15 |
Example - ABC S-Corp is a calendar year tax filer. Their 401(k) plan operates on a calendar plan year. Assuming no filing extension, ABC must fund their 2019 employer contribution no later than March 15, 2020 to deduct the contribution on their 2019 tax return. If an extension is filed, the deposit can be made as late as September 15, 2020.
All contributions (and forfeitures) allocated to 401(k) plan participants during a “limitation year” are considered “annual additions” under Internal Revenue Code (IRC) section 415. For most 401(k) plans, the limitation year equals the plan year.
The annual additions deadline is later than the deductibility deadline. It’s based on the type of contribution being made.
|
Contribution type |
Annual additions deadline |
|
Safe harbor matching* and nonelective contributions |
Last day of the plan year following the plan year in which the contribution is being made |
|
Non-safe harbor matching and nonelective contributions |
30 days following the due date of the company tax return (with extensions) |
|
Contributions to correct failed plan testing - top heavy minimums, QNECs and QMACs |
Last day of the plan year following the plan year in which the contribution is being made |
*Safe harbor matching contributions are subject to an additional deadline if they are calculated on a per-payroll basis and not “trued-up” at year-end. These periodic matches must be deposited no later than the plan year quarter following the plan year quarter in which the match was earned.
Following the close of each plan year, most 401(k) providers will send you a year-end information request – usually comprised of a questionnaire and an employee census request. They will likely impose a deadline for returning requested information if plan testing must be completed in time to meet the earliest ADP/ACP correction and/or contribution funding deadline. To hit a provider-imposed deadline (often January 31 for calendar year plans), it can be tempting to return missing or assumed information – in my experience, company ownership and compensation for self-employed individuals is the most difficult information to return quickly.
Don’t do it! Inaccurate information can lead to false test results. A false fail can lead to unnecessary corrections, while a false pass lead to uncorrected test failures. These issues can be expensive to fix years later.
Due to the stakes, you want to be 100% sure about the questionnaire responses you provide – even if that means a delay in plan testing. If you’re not sure how to respond, ask your 401(k) provider.
401(k) plans offer valuable tax benefits to employers and employees alike. These benefits are not free, however – to earn them, employers must keep their 401(k) plan in compliance with IRS qualification requirements.
One of the most technical qualification requirements is annual nondiscrimination and limits testing. Fortunately, a professional TPA most often completes this work today. However, employers should still understand testing basics even when a TPA is hired. One of the most important basics to understand is test deadlines. These are easily understood with a little education.