Compliance testing: What plan sponsors need to know

One of the most important tasks 401(k) plan sponsors are faced with every year is compliance testing.

“Compliance testing” refers to a series of IRS-required tests performed after year-end to ensure that a company’s 401(k) plan does not unfairly favor owners and highly compensated employees.

Traditionally, compliance testing can be a daunting process for employers. Testing conjures up unpleasant images of the IRS, plan corrections, and paperwork upon paperwork. With Guideline, we’ve automated compliance testing, freeing you up to focus on your business and your employees.

Guideline’s system uses data you provide to review your plan during the year to help maintain the plan’s compliance. Based on the data we receive, if your plan is at risk to exceed the limits on these tests, we will send you notifications and account alerts. These communications will notify you of what actions you can take to increase the likelihood of passing the tests and/or mitigating the impact of any required corrections. So it is very important that you read Guideline’s emails and review your dashboard tasks often.

Why is compliance testing necessary?  

The Internal Revenue Service (IRS) wants to ensure that 401(k) plans are used fairly to benefit employees, business owners, and officers alike when it comes to saving for retirement.


Contributing to a 401(k) comes with significant tax advantages for employees. If the regulations weren’t in place, a plan could fall into the trap of being almost exclusively enjoyed by company owners and executives. Staying compliant with 401(k) regulations ensures that the plan benefits all employees, that they are encouraged to save for retirement while keeping the plan’s tax-advantaged status safe.

I see a compliance alert on my dashboard. What does this mean?

Don’t be alarmed. It simply means if the year ended today, your company’s 401(k) plan would fall outside IRS-prescribed guidelines for passing one or more of the compliance tests. While your preliminary compliance status is updated daily, fortunately, the only test results that matter are those based on the plan’s year-end data. For example, final testing for the 2020 plan year is completed based on 12/31/2020 data. Your plan had until that date to get back (or remain) in compliance.

If your plan is outside the limits of one or more tests, Guideline will contact you with details on how you can get back into compliance or mitigate failures before the end of the year. By acting early, you have more options to pass the test(s) at year’s end. You should pay careful attention to all communications from Guideline so that your plan is in the best possible position with compliance testing.

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The Nondiscrimination and Limit Tests

Nondiscrimination Tests

Limit Tests

Want to avoid nondiscrimination requirements next year?

Nondiscrimination testing is an important part of building up retirement savings in America because it gives employers incentive to encourage even lower-paid employees to start contributing toward their retirement nest egg. However, it can be troublesome and time-consuming for plan sponsors to conduct annual testing, not to mention covering the costs involved with plan corrections.

The best way to support your employees’ retirement while avoiding the hassle of nondiscrimination testing is to design your plan as a Safe Harbor plan. Safe Harbor plan designs, if followed, generally satisfy nondiscrimination requirements, thus automatically exempting your plan from many of the other compliance tests. Learn more about creating a Safe Harbor plan here.

We’re here to help!

Guideline monitors your 401(k) plan throughout the year and will alert you if your plan is at risk of falling outside IRS compliance limits. If this happens, Guideline specialists are ready to discuss your correction options with you. Contact us with any questions!

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