Betterment is not a tax advisor. The information provided in our Support Center is educational and should not be considered tax advice. Please consult a tax professional.
If you have elected that Betterment for Business serve as your TPA, we handle your year-end compliance testing using the information you supply to us both during plan setup and on an ongoing basis. We may ask you to verify some information along the way and will report the results to you when the testing is complete. We will also let you know if any further action needs to be taken in the event that your plan does not pass one or more tests. Additionally, Betterment for Business will help you monitor your plan over the course of the year to avoid unnecessary surprises at year end.
For your reference, below is an overview of each test and what is needed to pass. Additional tests may be required depending on the plan design and contributions made.
|Test||What is it?||How do I pass?|
(Non-elective - 401(a))
|Were a sufficient # of non-HCEs eligible for profit sharing and/or Safe Harbor non-elective contributions?||Generally, these tests are passed if at least 70% of non-HCEs are eligible for contributions from the plan. A plan that does not pass may be required to make contributions to non-HCEs or those who were excluded from the plan to meet requirements.|
(Deferrals - 401(k))
|Were a sufficient # of non-HCEs eligible to contribute to the 401(k)?|
(Match/AT - 401(m))
|Were a sufficient # of non-HCEs eligible for matching (discretionary and/or Safe Harbor) contributions?|
|Did anyone within the plan contribute over the annual 402(g) limit (i.e. > $18,000 + catch-up for those eligible)?||Payroll systems generally track these limits to avoid failures. If this test is failed, the plan must distribute excess deferrals to the affected participants by April 15th to avoid double taxation. Forms 1099-R are issued to report distributions.|
Annual Additions Limits
|Did anyone have total contributions over the lesser of $54,000 (+ catch-up for those eligible) or 100% of compensation?||Most contributions are calculated with the annual additions limit in mind. If an excess occurs, the plan removes the excess from the participant account (typically via distributions starting with unmatched deferrals). Forms 1099-R are issued to report distributions.|
Top Heavy Test for 2017 Plan Year
|Are over 60% of plan assets “owned” by Key employees?||If a plan is considered Top Heavy (over 60% of assets in the plan are owned by key employees), the company generally must contribute up to 3% of compensation to all non-key employees. Safe Harbor 401(k) plans with only safe harbor and deferral contributions are deemed to meet Top Heavy requirements|
|Are employer contributions for the year within 25% of total “eligible” compensation?||Employer contributions are limited to 25% of gross compensation paid to all eligible employees during the year.|
Actual Deferral Percentage
|Are HCE deferral rates within a close range (~2%) of the average deferral rates of non-HCEs?||Generally, the HCE average deferral rate is limited by the NHCE average deferral rate as follows:
If the plan fails the ADP test, corrections can include (1) refunds to HCEs; (2) employer contributions to non-NHCEs; or (3) a combination of refunds and contributions.
Actual Contribution Percentage
|Are HCE average matching rates within a close range (~2%) of the average matching rate of non-HCEs?||The ACP test works exactly the same way as the ADP, but compares matching contributions (and after-tax contributions if applicable) for HCEs and NHCEs.|