Nondiscrimunation Testing Flashcards
What designations are used for employees under the nondiscrimination rules?
Non-highly compensated (NHC) and highly compensated (HC)
These designations are crucial for conducting nondiscrimination testing in employee benefit plans.
What is required for a company to be considered a member of a controlled group?
Ownership of at least 80% by a corporation
This rule helps define the relationships between companies for regulatory purposes.
How is ownership tested for individuals or noncorporate entities in controlled groups?
A separate test is applied
This ensures that the rules are applicable to various types of ownership structures.
What must employers of affiliated companies do for nondiscrimination testing?
Aggregate data if considered a controlled group
This aggregation is necessary to evaluate compliance with nondiscrimination rules.
What do minimum coverage rules focus on?
The relative proportion of NHCEs and HCEs who benefit
This is essential to ensure that plans do not disproportionately favor highly compensated employees.
What qualifies an employee as ‘benefiting’ under a plan?
They must receive contributions or accrual increases during the plan year
This includes both defined contribution (DC) and defined benefit (DB) plans.
What is the significance of employees eligible to defer salary under 401(k) plans?
They are considered ‘benefiting employees’
This applies even if they do not receive contributions due to non-participation.
What are ADP and ACP tests used for?
To determine if contributions discriminate in favor of highly compensated employees
These tests help ensure compliance with nondiscrimination rules in retirement plans.
What does the ADP test stand for?
Actual deferral percentage test
This test is applied to employee contributions in 401(k) plans.
What does the ACP test stand for?
Actual contribution percentage test
This test applies to employer matching and after-tax contributions.
Defined contribution plans must meet qualification requirements. What are the two IRS sections that meet the requirement for non-discrimination testing?
Minimum participation standards
IRC section 410(b)
Non-discriminatory contribution/benefit rule
IRC section 401 (a)(4)
What is IRC section 410(b)
Minimum participation standards
What is IRC section 401(a)(4)
Non-discriminatory contribution/benefit rule
What question is answered by IRC section 410(b)?
Is the plans coverage non-discriminatory?
Under IRC section 410 B related to minimum coverage , what are the two test used to test for non-discriminatory coverage?
Ratio percentage test
Average benefits test
Minimum coverage rules, IRC 410 B
Define the rat ratio percentage test
The plan benefits, a percentage of non-highly compensated employees that is at least 70% of the percentage of highly compensated employees that it benefits
Minimum coverage rules, IRC section 410 B
Define the average benefits test
This test is based on participant demographics, which change often
The plan must benefit employees who qualify under the employers classification system that is non-discriminatory in favor of highly compensated employees (classification test)
AND
The average benefit percentage for nine highly compensated employees must be at least 70% of the average benefit percentage for highly compensated employees, including the benefits, provided by Social Security
Ratio percentage test example
Regarding the ratio percentage test to test for coverage, what does benefited under the plan mean?
Benefited under the plan means that the employee is eligible… it does not mean they’re enrolled
IRC section 401(a)(4) non-discriminatory contribution benefit rule
What question is answered ?
Are the contributions and benefits non-discriminatory
What are the two alternatives for satisfying the requirements of the non-discriminate Tori contribution benefit rule?
- Design based safe harbors
-Uniform contribution/benefit rate, plan does not fail with contributions and benefits, are uniform relative to compensation for all participants
-Safeharbor integration
-401K plan that passes ADP ACP testing
- General test
- Restructure component plans based on contribution/benefit percentages of different employee groups with a plan and have each component comply with minimum coverage rules
Non-discrimination testing, define actual deferral percentage test ADP
- Pretax employee contributions
-must be passed each year
- Matching contributions may be used only if immediately vested subject to distribution limitations
Non-discrimination, testing actual contribution percentage test ACP
- After tax employee, contributions, and matching contributions
- must be passed each year
- Employer and matching contributions (except matching contributions used in ADP test)
IRC 401(a)(4) imposes ADP and ACP test testing for which type of accounts
401(k)
In order to perform ADP/ACP test what must be determined first
The relative deferral and contribution percentages of the organizations, highly compensated, employees and non-highly compensated employees
What is IRC section 415 pay?
415 pay is not just W-2 earnings; and include several types of income and is a fairly technical definition as defined in the IRC
When conducting non-discrimination testing what is the prior data rule?
Under non-discrimination rules, prior year data is used for determining highly compensated, employees and current or prior year non-highly compensated employee data determines the maximum deferral for highly compensated employees in the current year
What IRS code section defines pay
415
What is the ADP/ACP basic test?
The ADP/ACP basic test(1.25 test) allows highly compensated employees to have contributions no more than 1.25 times the contributions of non-highly compensated employees.
Example: if NHCEs average 4% contributions, HCE must be equal or less than 1.25*4% (5%)
How is the ADP/ACP alternative test?(2x2 test.) conducted.
HCE contributions can be no more than the lesser of:
2 times the contributions of NHCE
Or
2 percentage points greater than the contributions of NHCEs
Whichever is less…
Study example for ADPACP testing…
