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401(k) Discrimination Testing Checklist

October 1, 1996
The Small Business Job Protection Act has gone a long way in simplifying pension laws. The new law will virtually eliminate the headache of comparing 401(k) contributions of highly compensated employees against the same-year contributions of nonhighly compensated employees. The discrimination testing procedure is one that most, if not all, HR benefits managers usually dread. Here’s a checklist you can use in light of the recent bill that passed:

  • Evaluate how new testing rules affect your 401(k) plan. You may be able to simplify your discrimination testing ¼ or have more favorable test results.
  • Evaluate whether a safe harbor is right for you. If your current plan is al-most a safe harbor, it might make sense to change, but keep in mind how a safe harbor would impact your total compensation and business strategy.
  • Determine who is a highly compensated employee. You might simply include everyone making over $80,000, or with a highly paid workforce, only the highest paid 20%.
  • Decide whether to base testing on prior year contributions from nonhighly compensated employees. If you haven’t had problems with refunds or last-minute deferral limitations, you may prefer not to change your testing method.
  • Change how you determine who receives refunds and how much they get, if you must refund or recharacterize excess contributions.
  • Consider changing the way you calculate compensation. Including pre-tax contributions in the pay base may in-crease savings by low-paid workers.
  • Consider permitting employees with less than a year of service or under age 21 to participate in your 401(k) plan. They will get in the habit of saving earlier, and the low savings rates for nonhighly compensated employees in that group will no longer cause discrimination test failure.

SOURCE: Watson Wyatt Worldwide

Personnel Journal, October 1996, Vol. 75, No. 10, p. 78.