Posts Tagged ‘corrective distribution’

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Test – the word alone is enough to make even the most studious among us sweat. 

Now place it in the context of your 401(k) plan, i.e. determining whether your plan passes non-discrimination tests, and anxiety levels can easily go through the roof!

This article will take a brief look at ways to correct a failed Average Deferral Percentage (ADP) test, the non-discrimination test mandated by the Internal Revenue Code to determine whether 401(k) elective deferrals unfairly favor highly-compensated employees as well as how to use corrective distributions, a method available to fix a failed test.  It also outlines a few changes that can be made mid-year to improve test results and explains how to avoid the ADP test altogether. Read the rest of this entry »

Understanding Corrective Distributions

August 21st, 2017 by Jonathan Leidy

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Money Back is Good, Right?

Refunds can be great if you are referring to tax returns, or money back from an unfulfilling purchase. However, when it comes to your company’s retirement plan, refunds or corrective distributions are red flags indicating a deeper problem. They can be an administrative nightmare for plan sponsors and cause undue stress to highly-compensated employees who may be forced to refile their taxes.

What are Corrective Distributions?

Employees within your workforce are divided into two groups: highly-compensated employees (HCE) and non-highly compensated employees (NHCE).

HCE Table

Both groups have a desire to retire and contribute what they can to the company’s defined contribution plan, however their difference in pay will affect the amount which they can put away annually.

As a check on plan design equality, the IRS requires that both HCEs and NHCEs contribute to their 401(k) plans at similar percentages. If owners and managers contribute at far higher rates than their workers over the course of the year, the amount these executives have “over paid” will be refunded, which poses a problem for all parties involved. Read the rest of this entry »