LAST REVIEWED Jan 05 2022 10 MIN READ
By Joyce Yan Zhang
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 can take corrective action to avoid most penalties.
To help businesses from failing NDT, however, there are some important dates to keep in mind. 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 (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!
NDT testing compliance deadlines
Here’s a quick summary of important NDT deadlines:
October 1: Deadline to launch a startup 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 ADP and ACP nondiscrimination testing failures before a 10% excise tax and IRS Form 5330 is required
April 15: Deadline for any corrections for 402(g) excess deferrals in the prior calendar year for participants to avoid double taxation
December 31: Deadline for normal corrections for ADP and ACP testing failures, in order for the plan to stay in qualified status (10% penalty applies after March 15)
April 15 (of the following year): If corrective distributions or refunds are made to participants, they’ll receive an IRS Form 1099-R: Distributions From Pensions, Annuities, Retirement or profit-sharing plans, IRAs, Insurance Contracts, etc. which must be included as income on their individual tax return
Top-heavy contributions due for the current year, if necessary: Use the tax filing deadline, with extensions, for the plan year the test was conducted (e.g. if the top-heavy test is for the 2021 plan year, top-heavy minimums should be contributed by the employer's 2021 tax due date, with extensions—which is in 2022.)
Testing results and notifications: Your plan service provider is usually responsible for conducting IRS nondiscrimination testing and communicating your results, generally before refunds must be made on March 15.
401(k) matching and safe harbor deadlines
Specific plan designs and plan features have deadlines. Below are deadlines for offering a 401(k) employer match and a safe harbor match.
Starting a 401(k) match
Many employers begin by offering a 401(k) without a match. At a certain point, however, it may make sense to start offering a match. Depending upon the design of the plan, matching can be enacted immediately, at the end of the year on a one-time discretionary basis, or not until the beginning of the next year.
Starting safe harbor match: January 1
Safe harbor 401(k) plans 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’re starting a new safe harbor match 401(k) plan, you can start no later than October 1. Plans that are not safe harbor can also be started at any time, but do not enjoy the exemptions from annual IRS nondiscrimination testing.
Any 401(k) plan can be designed to include a safe harbor contribution—however, employer contributions are mandatory and must be fixed. In many cases, employer contributions are required to be immediately 100% vested. Click here for more information on safe harbor 401(k) plans, including contribution formulas, deadlines, and more.
Corrective distributions and refund deadlines and logistics
As we describe in our article about nondiscrimination testing failures, it’s 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 lose the tax-advantaged status of their retirement plan entirely.
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, 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 send the amounts that either need to be refunded to HCEs, or the amount of the qualified non-elective contribution (QNEC) the employer needs to deposit on behalf of NHCEs, if applicable.
To avoid penalties (for either the employers or employees), ADP or ACP refunds must be made by March 15, while QNECs must be deposited by the end of the calendar year. Usually, once the money is refunded back to HCEs, there’s no further action required. This is a best-case scenario for companies that have failed NDT.
What if an employer misses the March 15 deadline to process ADP or ACP refunds?
If an employer chooses to correct a failed test via refund to the HCE’s and does not process until after March 15, they’re 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 along with the penalty.
Overdue corrections can be a headache for all involved (particularly the employer and the employees)—so we highly recommend making it a priority to hit the March 15 deadline!
What happens if refunds or QNEC corrections are not made by December 31?
If a plan has exceeded the normal corrections period, either a Self-Correction Program (SCP) or Voluntary Correction Program (VCP) under the IRS’s EPCRS program must be used to correct the error. Failure to correct the issue can lead to plan disqualification. The 10% penalty for missing the March 15 deadline will also still apply. EPCRS guidance specifies how the correction must be made and requires the employer to make a QNEC contribution to the plan, as well as make refunds in some cases:
If the error is considered insignificant, it can be corrected at any time using the SCP.
If the error is considered significant, the SCP is available only if the issue is corrected within three years of the year of failure (the plan year in which testing was conducted).
For example, if the ADP test is for the 2021 plan year, the normal correction period will end on 12/31/2022 and the SCP period will end on 12/31/2024. If the employer determines the error is significant, and the SCP period has passed, VCP may be used to correct the issue. Be aware that there’s an application fee payable to the IRS for a VCP filing.
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 deadlines don’t have to be dealt with in the first place.
Low-cost 401(k) with transparent pricing
Sign up for an affordable and easy-to-manage 401(k).
Click here to learn more about Human Interest. And 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 Yan Zhang
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.