Limit Tests

While the larger focus on compliance testing is on ADP/ACP and the Top Heavy tests due to their costly corrections, the 401(k) limit tests are also important. These tests limit 401(k) deferrals and contributions based on annual compensation. Plans are subject to these tests even when they are Safe Harbor.

Note this article mentions industry terms such as HCE and NHCE, which are defined in the ADP/ACP article linked above.



402(g) Limit Test


This test determines whether any participant exceeded their Annual Contribution Limit on Pre-tax and Roth 401(k) salary contributions ($19,500 in 2020). Note that catch-up contributions are not included in this limit.

Testing Method

Make sure each participant does not contribute more than $19,500 in 2020 to their 401(k) account (includes both Pre-tax and Roth contributions, but not catch-up contributions).  

How To Fix It

If a participant contributes over the annual limit, they must withdraw their excess contributions by April 15 of the following year. If the participant misses the deadline, the excess contributions will be doubly taxed, meaning they will be taxed both in the year contributed and in the year distributed. They could also be subject to a 20% withholding tax and a 10% tax penalty.

If excess contributions are not withdrawn by the April 15th deadline, the entire plan will be at risk of disqualification. This applies only to a plan in which the participant surpassed their limit entirely in that plan. If a participant surpassed their limit between two plans but neither account went over $19,500 by itself, only the participant will be penalized. 

415 Annual Additions Test


This test determines whether any participant exceeded their 415 Annual Additions Limit on total overall annual contributions. This limit does not include rollover and catch-up contributions, but does include:

  • Pre-tax and Roth employee contributions
  • Employer matching and nonelective contributions
  • Safe Harbor contributions
  • Forfeiture contributions
  • Voluntary after-tax contributions*

*Guideline does not currently offer after-tax contributions.  

Testing Method

Add up all annual contributions listed above for each participant and make sure each individual does not go over the limit. The limit for 2020 is the lesser of 100% of gross compensation or $57,000.

How To Fix It

If a participant exceeds their Annual Additions Limit, they must withdraw excess contributions in the following order:

  1. Unmatched after-tax* employee contributions
  2. Unmatched employee contributions
  3. After-tax* employee contributions with associated matching contributions
  4. Employee contributions with associated matching contributions

*Guideline does not offer after-tax contributions.  

Any excess contributions distributed will not incur a 10% tax penalty; however, a 20% tax withholding does apply, and the withdrawals will be taxable in the year they are distributed. Distributions of excess contributions may also impact ADP/ACP testing.

Coverage Test


This test is used to ensure that a plan’s eligibility requirements are not overly restrictive.  Testing determines whether the plan meets certain minimum coverage standards set by the IRS.  

Testing Method

Generally, every 401(k) plan must cover a specified percentage of Non-Highly Compensated employees who have met the minimum age and service requirements set forth by the IRS. Union employees and nonresident aliens may be excluded from this test.

If you have a Guideline 401(k), your plan should automatically pass this test in normal situations. An outlier situation may be one in which your company is part of a controlled group (i.e.. a wholly-owned subsidiary), and the group does not share a 401(k) plan. In this case, all companies in the group must be tested together. If this happens, the ratio percentage test (RPT) is applied.  

When a plan has a last day requirement for allocations (such as profit sharing contributions), the RPT will always be required. A plan will pass the RPT if the percentage of NHCEs benefiting under the plan is equal to at least 70% of HCEs benefiting under the plan. 

If a plan does not pass the RPT, additional tests may be applied, but the need for this is rare.

How To Fix It

Plans have until October 15th of the year after the plan year to correct a coverage failure. The Plan Sponsor must generally extend plan coverage to a broader group of NHCEs.

If uncorrected, the plan could become disqualified, and HCEs, possibly NHCEs as well, must report contributions as income in the year the plan fails.


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