The IRS requires 401(k) plans to pass compliance testing each year to confirm your plan does not unfairly favor owners and highly compensated employees (HCEs), and that contributions stay within IRS limits. Failing a test can result in penalties, plan disqualification, and the loss of tax advantages for you and your employees. This article covers the types of tests, what happens if your plan fails, and how Gusto Retirement helps you stay compliant.
Your Gusto 401(k) plan may be subject to two categories of compliance tests each year.
Nondiscrimination tests confirm that 401(k) plans are accessible to all employees and that benefits are fairly distributed. These requirements give employers incentive to encourage lower-paid employees to start saving for retirement. Key nondiscrimination tests your plan may need to go through each year include:
Actual Deferral Percentage (ADP) test: Compares the average deferral percentage of HCEs to the average deferral percentage of non-highly compensated employees (NHCEs). Learn more about ADP and ACP testing.
Actual Contribution Percentage (ACP) test: Compares the average employer matching contribution percentage of HCEs to the average of NHCEs. Learn more about ADP and ACP testing.
Top-heavy test: Checks that if “key employees” hold more than 60% of total account balances, non-key employees get a minimum contribution under the plan. Learn more about the top-heavy test.
410(b) coverage test: Confirms the plan does not overly favor HCEs when it comes to who is eligible to participate. Learn more about 410(b) coverage testing.
Limits tests confirm that contributions stay within IRS-required thresholds. Gusto Retirement monitors these limits throughout the year:
Note: This is not a complete list. Gusto Retirement applies additional limits and nondiscrimination tests throughout the year and when contributions are calculated.
If your plan fails any compliance test, you need to take corrective action within a set timeline. Missing that deadline can lead to serious consequences, including plan disqualification and adverse tax consequences for you or your employees.
Gusto Retirement will contact you with details on how to correct the issue and the deadlines to do so.
Important: If Gusto Retirement does not get compensation data in a timely manner, it can mean additional costs — particularly if your plan fails the ADP or ACP tests. Pay close attention to your Compliance dashboard so your plan is in the best possible position to pass compliance testing.
Gusto Retirement may automatically process the excess contributions depending on the overage type. We will generally process excess employee deferrals as refunds to the employees. We will process excess employer contributions as a forfeiture to the plan and use them to offset future employer contributions until depleted.
Compliance testing can be a daunting and manual process for employers. Gusto Retirement automates compliance testing, so you can focus on your business and your team.
Throughout the year, Gusto Retirement uses the data you provide to generate projected test results. You can monitor these projections in the Compliance section of your administrator dashboard.
Choose the path that matches how you signed in to access your 401(k) dashboard.
Sign in to Gusto and go to Benefits. Under Savings, find 401(k) and select View, then select Manage 401(k)
Sign in directly at the Gusto Retirement sign-in page.
Review your Compliance dashboard regularly to monitor your plan's risk of falling outside IRS limits. If you have questions, our Retirement Specialists can discuss your correction options with you.
Note: These reports show projections only. Actual results are not finalized until after the plan year ends, once all contributions are made and full compensation and census data are available.
The simplest way to avoid most nondiscrimination testing is to adopt a safe harbor plan design. Safe harbor 401(k) plans generally satisfy most nondiscrimination requirements, which automatically exempts your plan from most of these tests — and supports your employees' long-term retirement savings.
Learn more about the benefits of adopting a safe harbor plan.