Impact of plan design

Most employers are aware that their 401(k) plan has to pass various tests each year to stay in compliance but don’t generally know the details of these tests until they fail one or more of them. The average deferral percentage and average contribution percentage tests (ADP and ACP respectively) are the most problematic for many plans and so they are also the best known but not necessarily well understood.

There are other tests like the coverage test which looks at the eligible participant base and insures that a required number of those employees are covered by the plan that can both cause their own test specific headaches but can also come to the aid of employers if conducted by a knowledgeable third party administrator. A seasoned plan administrator goes beyond the first pass at these tests and uses the rules to apply disaggregation and other techniques available to help employers pass ADP and ACP tests as well as reduce participant counts to stave off plan audit requirements and achieve other employer priorities.

Many plans return money to their “highly compensated” employees needlessly every year because either their plan administrator isn’t familiar with these techniques or in the case of some large bundled service providers they can’t or won’t offer these services.

Good plan design will make a plan more efficient and effective in achieving the priorities of the employer. The question is do you have the optimal plan design?

Subject Reference Information