401(k) nondiscrimination testing compliance deadlines

10 MIN READEditorial Policy

401(k) plans can offer tremendous benefits to employers and their employees. However, to help track that 401(k) plans aren't favoring specific employees (such as highly-compensated employees or key employees), they must pass annual nondiscrimination tests (NDT for short) based on the features of the plan. Failing NDT is fairly common and businesses must take corrective action in these situations to avoid plan disqualification.

There are some important dates to keep in mind to allow for time to prepare and review nondiscrimination testing results. This guide reviews key compliance deadlines to remember if you’re administering a 401(k) plan with a calendar year-end. Your 401(k) provider may need some information from you directly to help you hit these deadlines, so make sure to be extra safe and get the ball rolling well before these dates!

Get started with an affordable, full-service Safe Harbor 401(k) plan.

More advantages with a Safe Harbor Plan

With a Safe Harbor plan, you can get the benefits of both a traditional 401(k) and profit sharing plan.

NDT testing compliance deadlines 

Here’s a quick summary of important NDT deadlines:

  • October 1: Deadline to launch a new safe harbor match 401(k) plan for the current calendar year

  • January 1: Date on which plans with a new safe harbor match feature can take effect

  • March 15: Deadline for any corrections for a non-EACA plan for ADP and ACP nondiscrimination testing failures before a 10% excise tax is assessed via IRS Form 5330 

  • April 15: Deadline for any corrections for 402(g) excess deferrals in the prior calendar year for participants to avoid double taxation 

  • June 30: Deadline for any corrections for an EACA plan for ADP and ACP nondiscrimination testing failures before a 10% excise tax is assessed via IRS Form 5330 

  • December 31: Deadline for corrections for ADP and ACP testing failures, in order for the plan to stay in qualified status (10% penalty applies after March 15 or June 30 if refunds are required)

Testing results and notifications: Your plan service provider is usually responsible for conducting IRS nondiscrimination testing and communicating your results and correction options (if applicable), generally before the date any corrective refunds must be made without penalty.

However, the results may be delayed based on when your service provider receives the necessary information needed to perform the nondiscrimination testing. Your service provider will also communicate the deadline for any required employer contributions due to the plan based on testing results.

Corrective distributions and refund deadlines and logistics

As we describe in our article about nondiscrimination testing, it’s not uncommon for plans to fail ADP or ACP testing. However, corrective measures must be taken in a timely manner—or, employers may be assessed an extra 10% excise tax on the delayed refunds.

Plan service providers usually begin conducting annual testing in January for the previous year and will communicate results soon thereafter. Many times, the provider will require you to begin the process by providing certain information. Because the deadline for corrections is March 15 or June 30 (based on plan provisions), you can see that the earlier you provide this requested information, the better.

What happens if an employer fails ADP or ACP testing? 

In these situations, plan service providers will provide options available to correct the testing failure. They may include one or more of the following items: amounts to be refunded to HCEs, a retroactive 4% safe harbor non-elective contribution, or the amount of the qualified non-elective contribution (QNEC) the employer needs to deposit on behalf of NHCEs.

To avoid penalties , ADP or ACP refunds must be made by March 15 or June 30, while safe harbor non-elective or QNEC contributions must be deposited by the end of the calendar year. Most plan sponsors choose to process HCE refunds, since this option does not require any additional funding to the plan. 

What if an employer misses the deadline to process ADP or ACP refunds without penalty?

If an employer chooses to correct a failed test via refund to the HCE’s but the checks are issued after the appropriate deadline, the plan sponsor is responsible for paying a 10% excise tax. In this situation, the plan service provider will prepare IRS Form 5330: Return of Excise Taxes Related to Employee Benefit Plans, which the employer submits to the IRS along with the penalty. 

What happens if ADP or ACP corrections are not made by December 31 of the following plan year?

The Employee Plans Correction Resolution System (EPCRS), provided by the IRS, outlines the options available when a plan does not complete nondiscrimination testing corrections within the 12 month period following the year end. There are two options available for plans that miss the 12 month correction window:

  • QNEC. The sponsor may choose to provide a QNEC that will increase the NHCE average to the appropriate level to allow the ADP or ACP tests to pass. Essentially, this is the same correction as allowed during the 12 month correction window, but the QNEC must now be increased for earnings between the due date of the correction versus the actual date the contribution was made to the plan.

  • One-to-one correction method. If the sponsor wishes to refund the HCE’s to correct the testing failure, they may do so, but only if they contribute a QNEC in the same amount as the refunds to the NHCE’s. In addition, the 10% excise tax on the late refunds still applies. 

Human Interest and NDT deadlines

Looking for a 401(k) provider that will help with NDT compliance testing? Human Interest offers flexible, affordable 401(k) plans that include support for compliance. We work with all of our clients to:

  • Set expectations upfront (some companies inherently have a higher risk of failing NDT than others).

  • Fully inform clients of deadlines in advance: We’re happy to explain the ins and outs of NDT so our clients aren’t left in the dark and blindsided by a last-minute deadline.

  • Advise on safe harbor plan designs that allow the plan to avoid some NDT,so that corrective measures don’t have to be dealt with in the first place.

More advantages with a Safe Harbor Plan

With a Safe Harbor plan, you can get the benefits of both a traditional 401(k) and profit sharing plan.

If you’d like more context on nondiscrimination testing in general (or need more clarity on terms like “safe harbor” and “QNECs”), here are some more articles on NDT:

Joyce Zhang previously worked for the Federal Reserve & US Department of Labor. She holds an MBA from Stanford, MPA from Princeton, and BA from Harvard.

Subscribe to our Retirement Roadmap newsletter

Retirement isn’t just a destination. It’s a journey, and we’re here to help you. Our newsletter delivers succinct and timely tips, reviewed by Financial Advisors, to help you navigate the path to financial independence.

By providing your email above or subscribing to our newsletter, you agree to our Privacy Policy. You also elect to receive communications from Human Interest.