Avoiding headaches during nondiscrimination testing

Every year, businesses are required to complete nondiscrimination testing for their retirement plans. That’s the IRS’ way of checking to make sure your plan doesn’t favor one group of participants over another.

We know retirement plan compliance can be frustrating and complicated, but it doesn’t have to be. Here are a few things to keep in mind and help you avoid unnecessary penalties as you work through nondiscrimination testing.

  • Testing 101
    • Nondiscrimination testing reviews your payroll from the previous year. It looks at each employee’s gross compensation, their contributions to the retirement plan, and the employer match.
    • Then it checks that the highly compensated employees (visit the IRS website for definitions) are not significantly benefitting more than the other employees when it comes to your retirement plan.
  • Control what you can and try not to put it off. If you’re behind on testing, you could be assessed a penalty, which can be costly.
    • Vendors request information by Jan. 31 so they have time to review it and get it back to you. Then you can make adjustments before it’s officially due on March 15.
    • Tip: Many recordkeepers review questionnaires in the order they’re received, and if it’s not to the vendor on time in January, it can throw off the whole process.
  • Most importantly, you shouldn’t have to do it all by yourself. It’s okay to ask for help.
    • If your relationship manager at your recordkeeper isn’t able to answer your questions, ask for someone from their testing or compliance department instead.
    • If you work with a retirement plan advisor like Clearview Advisory, we can guide you, too. An advisor should be familiar with testing and offer guidance on answering the questionnaire.

These are just the basics about nondiscrimination testing. If you run into issues year after year, it might be time to talk more seriously with your retirement plan advisor about how to address the underlying cause and save yourself from future headaches, too.

Clearview Advisory would love to hear your experiences with testing and other retirement plan compliance issues. What have you learned over the years?

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