Compliance Definitions
Highly Compensated Employee
Definition:
An employee who is a greater than 5% owner* at any time during the plan year or preceding plan year, regardless of how much compensation that employee earned or an employee who for the preceding plan year, earned in excess of an indexed amount.
*Ownership is measured by stock ownership (or capital/profit interest if not incorporated), and voting rights. Certain relatives of a greater than 5% owner are also considered to be highly compensated as a result of family attribution.
IRC §402(g) Maximum Deferral Limit
Overview:
The Internal Revenue Service (IRS) limits the amount a participant can defer for a calendar year to an indexed dollar amount.
IRC §401(k) Actual Deferral Percentage (ADP) Test
Overview:
The ADP Test is designed to assure that highly compensated employees do not unfairly benefit from the plan. To do so, the ADP Test compares the average deferral percentage (ADP) of the highly compensated employee (HCE) group to the ADP of the non-highly compensated employee (NHCE) group. A plan that fails the ADP Test commonly refunds excess contributions (adjusted for associated gains/losses) to one or more highly compensated employee in order to correct the failure.
IRC §401(m) Actual Contribution Percentage (ACP) Test
Overview:
The ACP Test is designed to assure that highly compensated employees do not unfairly benefit from the plan. To do so, the ACP Test compares the average contribution percentage (ACP) of the highly compensated employee (HCE) group to the ACP of the non-highly compensated employee (NHCE) group. A plan that fails the ACP Test commonly refunds excess match (adjusted for associated gains/losses) to one or more highly compensated employee in order to correct the failure.
IRC §410(b) Minimum Coverage Test
Overview:
The coverage requirements of IRC §410(b) require that plan benefits be provided in a non-discriminatory basis. The 410(b) Coverage Test assures that a significant percentage of non-highly compensated employees benefit from the plan in relation to the percentage of highly compensated employees that benefit.
IRC §415(c) Maximum Annual Additions Test
Overview:
The amount of “annual additions” to a participant’s account for the plan year are limited to the lesser of an indexed dollar amount or 100% of the participant’s eligible compensation. Catch-up contributions do not count toward the maximum.
IRC §416 Top Heavy Test
Overview:
A plan is considered top heavy if the “key” employees hold a disproportionate percentage of the plan’s eligible assets. If key employees control more than 60% of the plan’s assets as of the last day of the plan year, the plan is considered top heavy for the following plan year. If a plan is top heavy, the employer may need to provide a contribution of up to 3% of compensation to each non-key employee employed on the last day of the plan year.
