If you’d like more context on non-discrimination testing in general or are unfamiliar with terms like Safe Harbor and QNECs, here are some more general articles (we recommend starting with the first one!):
- Non-Discrimination Testing: The Basics of IRS 401(k) Compliance
- Failing Non-Discrimination Testing: How to Correct It (or Prevent Failing Altogether!)
- Non-Discrimination Testing for Startups
Below are the key deadlines to keep in mind if you are administering a 401(k) plan and are concerned about non-discrimination testing.
Keep in mind that all 401(k) providers need a few months/weeks of notice to help you hit these deadlines (due to the nature of pay periods), so make sure to be extra safe and get the ball rolling well in advance of these dates! You can sign up to talk to Human Interest here:
October 1st: Deadline for existing plans that are establishing a safe harbor 401(k) plan for the following calendar year
January 1st: Date on which new safe harbor 401(k) plans can take effect
March 15th: Deadline for any corrections for non-discrimination testing failures before a 10% excise tax and IRS Form 5330 is required
December 31st: Deadline for normal corrections for non-discrimination testing failures
April 15 (following year): If any corrective distributions or refunds need to be made to individuals, you will have to remind your employees that they must file the IRS Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. by the April 15th personal tax filing deadline in the next year.
Testing results and notifications: Your plan provider will usually conduct annual IRS non-discrimination testing in January for the previous year and is responsible for communicating the results to the company, usually by early February.
Here is the full IRS calendar for all retirement plan deadlines: https://www.irs.gov/Retirement-Plans/Mark-Your-Calendar-4
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401(k) matching and safe harbor deadlines
Starting regular match:
Many employers begin by offering a 401(k) without a match, especially if they’re in the early stages of the company and budgets are constrained. At a certain point, it makes sense to start offering a match. Depending upon the design of the plan, matching can be enacted immediately, at the end of the year in a one-time discretionary basis, or not until the beginning of the next year.
Starting safe harbor match: January 1
Given the huge benefits of a safe harbor 401(k) plan, the rules around them are stricter and follow specific deadlines. If you have an existing 401(k) plan without a match that qualifies for safe harbor, you can only begin safe harbor at the beginning of the next calendar year: January 1. If you are starting a new safe harbor 401(k) plan, you can start it at any time during the year.
Plans that are not safe harbor can also be started at any time, but do not enjoy the exemptions from annual IRS non-discrimination testing.
Switching to safe harbor: October 1
If your plan is currently not a safe harbor plan, but you would like to change it to be safe harbor for the next year, this requires an amendment to the IRS-approved plan documents that govern your 401(k) plan, and must therefore be enacted by October 1.
Corrective distributions and refund deadlines and logistics
As we describe in our blog post about non-discrimination testing failures, it is not uncommon for plans to fail ADP, ACP, or top heavy testing. However, corrective measures must be taken in a timely manner or employers could potentially have to pay an extra 10% excise tax or could lose the tax-advantaged status of their retirement plan entirely.
As we mentioned above, your plan provider will usually conduct annual testing in January for the previous year and they will communicate the results to you usually by early February. Because the deadline for corrections is March 15, you can see that the earlier that your plan provider notifies you of your results, the better.
In the event that the company fails ADP/ACP, the plan provider will send the amounts that either need to be refunded to HCEs, or the QNEC for NHCEs (lots of acronyms here — if you’re confused, head over to NDT Basics and Failing NDT). If corrections are made by March 15, there will be no penalties for either the employers or employees. Usually, once the money is refunded back to HCEs, there is no further action required. This is a best case scenario for companies who have failed NDT.
If the company misses the March 15th deadline, to process the refunds, the company is responsible for paying a 10% excise tax and the plan provider will prepare IRS Form 5330: Return of Excise Taxes Related to Employee Benefit Plans. The two cases we describe below of extremely overdue corrections are a huge headache for all involved (particularly the employer and the employees), so we highly, highly recommend making it a priority to hit the March 15th deadline!
If the corrections are still not made by December 31st, then the plan has exceeded the normal corrections period, and either a Self-Correction Program (SCP) or Voluntary Correction Program (VCP) must be used to correct mistakes.
After December 31st of the following year, or two years after the initial non-discrimination testing failure, the plan might lose its tax-advantaged status, which means the employer and the employees would have to pay taxes on some or all of their 401(k) contributions.
After two years, SCP may only be used as long as the mistake can be classified as insignificant, whereas VCP may be used to correct both insignificant and significant mistakes. Additionally, there is a 10% penalty the employer must pay if the failure is not corrected within the timelines stated by the IRS. So, if you do receive notice of failure make sure you are crystal clear on any subsequent deadlines for corrections.
Human Interest and NDT Deadlines
We work with all of our clients to:
- Set expectations up front (some companies are at higher risk of failing NDT than others).
- Fully inform clients of deadlines in advance — most companies are not experts in IRS deadlines and restrictions, which is completely understandable! We have plenty of experience with this, so we’re happy to explain the ins and outs of NDT so that clients aren’t left in the dark and blindsided by a last-minute deadline.
- Keep track of and deliver the necessary information and recommended solutions by the IRS deadlines. We have had clients who came to us after working with another 401(k) provider who was not communicative. As a result, the client missed several deadlines despite plenty of vigilance on the company administrator’s part and ended up failing NDT. This is unfortunately more common than it should be, and we make it a top priority to make sure this does not happen to Human Interest clients. Quick turnaround and responsiveness are crucial!
- Take preventative measures to avoid failing NDT so that the corrective measures deadlines don’t have to be dealt with at all.
To avoid having to keep track of NDT deadlines, the easiest thing to do is to choose a safe harbor 401(k) plan. After setting it up, you will no longer have to worry about non-discrimination testing or making timely refunds in the event of failure. It offers you peace of mind and incentivizes your employees to invest more into retirement as well. This is our general recommendation to most companies, but if your company cannot afford a safe harbor match, we’re happy to work with you on a custom plan that better suits your needs.
Many thanks to Connie D. Husley, QKA, ERPA, and Compliance Specialist, for her help in reviewing the content of this article.