MERCER 401(k) COMPLIANCE
TESTING MANUAL – 2013
A RESOURCE FOR TESTING INFORMATION
© 2013 by Mercer HR Services, LLC. All contents are the confidential and exclusive property of
Mercer. All rights reserved. No part of this work may be reproduced, transmitted, or transcribed
by any means, electronic or mechanical, now known or hereafter invented, including but not
limited to photocopying and recording, or by any information storage or retrieval systems, except
as expressly permitted by the copyright owner.
Developed by the Reporting & Testing Department.
2013
M271662 6/13
TA B L E O F C O N T E N T S
I N T R O D U C T I O N.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................................................................................. 1
D ATA R E Q U I R E M E N T S F O R T E S T I N G................................................................................... 2
Identification of Certain Employees ...............................................................................................................2
A. Highly Compensated Employees (HCEs) ..............................................................................................2
B. Highly Compensated Employees Using the Optional Top 20% Election ...............................................2
C. Key Employees ...................................................................................................................................3
Correct Compensation for Testing .................................................................................................................4
A. ADP/ACP Testing Compensation .........................................................................................................4
B. 415 Compensation .............................................................................................................................4
C. Deferral Compensation . .....................................................................................................................4
D. Post-Severance Compensation ............................................................................................................5
E. Employees Who Received Post-Severance Compensation ....................................................................5
F. Employees Who Received Differential Pay ............................................................................................6
Correct Testing Population .............................................................................................................................7
A. Eligible Employees ..............................................................................................................................7
B. Collectively Bargained Employees ........................................................................................................7
C. Location Codes . .................................................................................................................................7
D. Excludable Employees .........................................................................................................................8
E. Early Participation Rule ........................................................................................................................8
F. Otherwise Excludable Employees .........................................................................................................8
A N N U A L N O N D I S C R I M I N AT I O N T E S T ING............................................................................. 9
Testing Overview ...........................................................................................................................................9
A. ADP/ACP Test .....................................................................................................................................9
B. 410(b) Minimum Coverage Test ........................................................................................................12
1. Ratio Percentage Test ....................................................................................................................12
2. Average Benefits Percentage Test ..................................................................................................13
C. 415 Annual Additions Test . ..............................................................................................................13
D. Top Heavy Test . ................................................................................................................................14
A D D I T I O N A L T E S T I N G T H AT M AY B E REQUIRED................................................................ 15
A. 401(a)(4) General Testing . ................................................................................................................15
B. 401(a)(4) Benefits, Rights & Features .................................................................................................15
C. 414(s) Compensation Test . ...............................................................................................................16
Scenarios that May Affect Your Test Results . ...............................................................................................17
A. Mergers, Acquisitions, Spin-offs, and Other Workforce Changes ......................................................17
B. Plan Amendments or Discretionary Changes .....................................................................................17
C. Controlled Group Status ...................................................................................................................17
Four-Year COLA Summary............................................................................................................................19
S A F E H A R BO R P L A N S.. . . . . . . . . . . . . . . . . . . . . . ................................................................................ 20
E L I G I B L E A U T O M AT I C C O N T R I B U T I O N ARRANGEMENT (EACA).. ........................................... 22
S H O RT P L A N Y E A R S A N D T H E I M PA C T ON TESTING............................................................ 23
Determining Highly Compensated Employees ..............................................................................................23
Annual Limits Must Be Prorated . .................................................................................................................23
I M P O RTA N T D AT E S A N D D E A D L I N E S.. ................................................................................ 24
Correction Timing and Penalties ..................................................................................................................24
FA I L E D T E ST S.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................................................................................. 26
Guide to Correction Methods ......................................................................................................................26
A. ADP/ACP Nondiscrimination Testing . ................................................................................................26
B. Section 415 Annual Additions Limits . ...............................................................................................28
C. Requirements for Top Heavy Plans ....................................................................................................29
D. Catch-up Contributions ....................................................................................................................30
I N T E R I M N O N D I S C R I M I N AT I O N T E S T ING............................................................................ 31
A. Compensation for Interim Testing .....................................................................................................31
B. Plan Aggregation ..............................................................................................................................32
C. Interim Testing of Matching Contributions ........................................................................................32
D. How Are Contributions and Compensation Projected for Interim Testing? ........................................32
E. What to Do With Your Test Results ...................................................................................................33
P U E RT O R I C O P L A N S.. . . . . . . . . . . . . . . . . . . . . . . ................................................................................ 34
F O R M S A N D S A M P L E T E S T.. . . . . . . . . . . . . . ................................................................................. 35
Demo Test....................................................................................................................................................36
Compliance Testing Services Waiver .............................................................................................................52
Tax Withholding Waiver ...............................................................................................................................53
Compliance Testing Manual
INTRODUCTION
Mercer is pleased to offer you an online resource to provide the
information needed before and after compliance testing is performed
for your plan. This document is provided for informational purposes
only and is not intended to be exhaustive or to constitute authoritative
guidance or legal advice. Plan sponsors should consult their own legal
counsel, consultants, financial advisors, actuaries or other experts for
specific guidance on their individual circumstances.
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Identification of Certain Employees
A. HIGHLY COMPENSATED EMPLOYEES (HCEs)
The Actual Deferral Percentage/Actual Contribution Percentage (ADP/ACP) tests compare deferral and matching
contribution percentages of HCEs to those of Non–Highly Compensated Employees (NHCEs). As such, the correct
identification and coding of HCEs is critical to an accurate test.
For the current plan year, an HCE is any employee who was:
• Actually paid over the gross compensation limit determined by COLA (see Four-Year COLA Summary and
Correct Compensation for Testing section), during the prior plan year (or prior 12-month period, if the prior
plan year was shorter than 12 months – also known as the “look-back period”), regardless of the amount of
compensation actually paid during the plan year being tested; or
• An owner of more than 5% of a company sponsoring the plan, either during the plan year being tested or the
look-back period; or
• A family member of an over-5% owner.
Note: Certain family members of over-5% owners are treated as having the same share of ownership, under
Section 318 of the Internal Revenue Code; this includes the over-5% owner’s spouse, parents, grandparents, and
children. For example, the child of an over-5% owner is also considered an over-5% owner, and is therefore an
HCE regardless of the child’s compensation.
Mercer will perform a preliminary determination of HCEs and Key Employees for your review and validation based
on the data in our recordkeeping system and any additional information you provide regarding ownership, family
members, and officers. It is your responsibility to provide updates to Owner and Officer information, as well as
any updates to compensation, employee data or plan provisions annually to your Client Service Representative.
Failure to provide this information could result in delayed and/or inaccurate test results.
Return to the Table of Contents.
B. HIGHLY COMPENSATED EMPLOYEES USING THE OPTIONAL TOP 20% ELECTION
If your plan document requires you to use the Top 20% Election, the determination of this group of employees
will need to be done as described below. Mercer will perform the preliminary determination of your plan’s HCEs
for your review and validation based on data in our recordkeeping system along with any additional data we may
need to collect from you. If there are other companies in the Controlled Group whose records are not kept at
Mercer, the list of HCEs must be provided to Mercer.
1.In computing the number of employees in this top-paid 20% group (Top-Paid Group), begin with all employees
who were employed at any time during the look-back period, including those ineligible to participate in the
plan (and including all employees of other companies in a Controlled Group or Affiliated Service Group).
However, the following may be excluded:
• Employees with less than six months of service by the end of the look-back period; or
• Part-time or seasonal employees scheduled to work less than 17½ hours per week, or less than 6 months
per year; or
• Employees under 21 years of age as of the end of the look-back period; or
• Employees in a collective bargaining unit (if 90% or more of all employees are collectively bargained members
and they were excluded from the plan); or
• Non-resident aliens with no U.S.-source income.
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2.Determine the total number employed at any time during the look-back period, excluding any in the
above categories.
3.Multiply this total by 20%, rounding up or down to a whole number, to get the total number in the
Top-Paid Group (apply the same rounding rule consistently each year).
4.Look at all employees, regardless of whether they are eligible, in the order of gross compensation paid for
the year before the year being tested. Starting with the highest paid employees, count down the Top-Paid
Group number to determine which employees are in your Top-Paid Group. If employees that are not
actually eligible for the plan are included in this count, they will not be included in the test, but are still
included as HCEs in your Top-Paid Group.
5.Finally, the test will also include any eligible employees who are over-5% owners (including certain family
members), whether or not they are in your Top-Paid Group.
Return to the Table of Contents.
C. KEY EMPLOYEES
A Key Employee is any employee who, at any time during the plan year, was:
• An officer with total gross compensation in excess of the annual compensation limit, (see Four-Year
COLA Summary); or
• An over-5% owner (including certain family members); or
• An over-1% owner (including certain family members) with gross compensation in excess of the annual
compensation limit.
Note: Certain family members of owners are treated as having the same share of ownership under Section 318
of the Internal Revenue Code; this includes the owner’s spouse, parents, grandparents, and children. For
example, the child of a 1% owner is also considered a 1% owner, and the child would be a Key Employee
if his or her compensation was also over the annual compensation limit.
An officer for Top Heavy purposes means a key administrative executive of the company, not necessarily
anyone who has a corporate title. For purposes of the Top Heavy test, Internal Revenue Service (IRS) guidelines
allow you to limit those considered officers to 10% of the total number of employees (but not fewer than 3
or more than 50). Only officers with gross compensation over the annual compensation limit, (see Four-Year
COLA Summary), are treated as Key Employees.
In order for Mercer to perform a preliminary determination of HCE and Key Employees for your review and
validation, you will need to provide additional information regarding ownership, family members, and officers.
It is your responsibility to provide updates to Owner and Officer information annually to your Client Service
Representative. Failure to provide this information could result in delayed and/or inaccurate test results.
Return to the Table of Contents.
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Correct Compensation for Testing
A. ADP/ACP TESTING COMPENSATION
Please review your plan document for the definition of compensation used by your plan for ADP/ACP testing.
This may or may not be the same definition used by your plan for other purposes, such as Section 415
testing or determining contribution amounts.
For example, some plans exclude compensation paid before the date an employee became eligible for the
plan. If your plan contains this provision, testing compensation paid for the period before the employees
become eligible could be excluded for ADP/ACP testing, but must still be included for Section 415 testing
(see below). Compensation earned during any period in which an employee was eligible must be included
(even if he or she elected not to make salary deferrals to the plan).
Compensation used for ADP/ACP testing must satisfy IRC Section 414(s). 415 compensation (see below)
is a safe harbor definition for 414(s) compensation purposes. There are three allowable modifications to
Section 415 compensation that would allow the modified 415 compensation to remain under the safe
harbor definition for 414(s). If you are not using 415 compensation for ADP/ACP testing, then you should
confirm whether the compensation you are using falls within the safe harbor definition of 414(s). If not,
the compensation used needs to pass the compensation ratio test. Mercer may be able to provide this test
for you. If you have questions, contact your Client Services Representative.
Return to the Table of Contents.
B. 415 COMPENSATION
IRC Section 415(c)(3) compensation data is needed for all employees who were employed at any time
during the plan year being tested. Compensation for Section 415 testing is defined by IRS regulations and is
required to be used for the determination of Highly Compensated and Key Employees and in applying the 415
limits. It includes all federal taxable compensation, plus any before-tax deductions contributed to a 401(k),
Section 125, or similar tax-qualified plan. Other amounts not currently taxable to the employee (e.g., stock
options, non-qualified deferred compensation, or moving expenses deductible by the employee) are not
included in this definition.
T he 415 compensation provided will be used to determine your Highly Compensated Employees (HCEs).
(View the definition of a Highly Compensated Employee.) If your plan’s definition of ADP/ACP compensation
is not 415 compensation, then you will need to provide more than one compensation amount for each employee.
Among other mandatory plan provisions effective for years starting after December 31, 2008, the Heroes
Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”), directs that “differential pay” must be
included in 415 compensation. For more information regarding differential pay, see “EMPLOYEES WHO
RECEIVED DIFFERENTIAL PAY” in section E below.
Return to the Table of Contents.
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C. DEFERRAL COMPENSATION
If your plan document allows for catch-up contributions for employees age 50 and over, and your plan
limits deferrals (either for all employees or for HCEs only) to a certain percentage of compensation less than
75%, you should also check your plan’s definition of the compensation on which these deferral limits are
based. It may be the same as 415 compensation or ADP/ACP testing compensation, but if it is not, you should
arrange to provide us with the deferral compensation amounts as well. Otherwise, we will not be able to
determine whether catch-up amounts have been accurately calculated. This can impact the validity of your
other testing, since catch-up amounts can be excluded from testing only if the participant had actually
exceeded a regulatory or plan-specific limit as of the end of the plan year. This is not an issue if your plan’s
deferral limits have been eliminated or raised to 75% or higher.
Return to the Table of Contents.
D. POST-SEVERANCE COMPENSATION
In general, compensation does not include compensation paid after an employee severs employment.
However, there are 2 exceptions:
1.A plan can count compensation paid to former employees who are in the US military or permanently and
totally disabled.
2.A plan can count compensation paid by the later of 2½ months after severance of employment or the last
day of the limitation year in which the employee severed employment if:
a.The payment was for services rendered (e.g., salary, commissions, overtime, bonus, etc.), which the
employer would have paid if employment had continued, or
b.The payment was for unused accrued sick leave, vacation pay, or other leave, which the employee could
have taken if employment had continued, or
c.The payment was from an unfunded nonqualified deferred compensation plan, to the extent includible
in income, if the employee would have received the payments at the same time if employment had
continued.
Payments in 2.b. and 2.c. count as compensation only if they would have been compensation if the employment
had continued. Compensation does not include any of the following amounts paid after employment termination:
severance pay, parachute payments, or payments from unfunded deferred compensation plans that are
“triggered” by severance.
E. EMPLOYEES WHO RECEIVED POST-SEVERANCE COMPENSATION
When employees are awarded severance pay after terminating employment, elective deferrals should not be
withheld from that compensation and it should not be included in compensation for testing purposes.
If the definition of ADP testing compensation used by your plan includes post-severance compensation, we
suggest you include it in testing compensation for employees who terminated during the plan year being
tested. However, employees who terminated in the prior plan year and have only residual compensation or
post-severance compensation in the plan year being tested may be included in testing for the plan year after
termination. As the plan sponsor, you must determine if eligibility relates to the year of termination or if it
relates to the year of the final paycheck.
Return to the Table of Contents.
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F. EMPLOYEES WHO RECEIVED DIFFERENTIAL PAY
The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) was signed into law on June 18, 2008.
Among other mandatory plan amendments, effective for plan years starting after December 31, 2008, it
requires that “differential pay” be considered as compensation for Section 415 purposes. This would include
the use of differential pay in determining Highly Compensated Employees (HCEs).
For purposes of this statutory provision, differential pay is considered to be any payments by an employer
to an individual while that individual is on active military duty for more than 30 days and for which such
payments would constitute a portion or all of the compensation that the individual would have earned if
he or she was employed by said employer.
Differential pay is not required to be included as plan compensation for determining contributions or benefits
and a plan’s definition of plan compensation will not be considered to have failed the compensation
ratio test under 414(s) merely because the plan sponsor elects not to include differential pay under “plan
compensation.” If differential pay is included in plan compensation, the contributions and benefits derived
from differential pay are not required to be included in nondiscrimination testing or coverage testing as long
as all those in the controlled group can receive differential pay on similar terms and all who receive differential
pay and who are eligible to participate in the plan can contribute from differential pay on similar terms. To
the extent that the plan sponsor includes contributions and benefits derived from differential pay in testing,
such contributions/benefits could not allow the plan to fail. When applying either approach, i.e., taking
contributions/benefits into account or not taking them into account for testing, the plan sponsor needs to be
consistent with respect to all employees. For example, the plan sponsor cannot include some deferrals made
from differential pay in the ADP test while excluding other deferrals made from differential pay.
Section 105(c) of the HEART Act requires that plans be amended for this statutory provision by the last day
of the first plan year beginning on or after January 1, 2010. Governmental plans would have to amend their
plans by the last day of the first plan year beginning on or after January 1, 2012.
Return to the Table of Contents.
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Correct Testing Population
A. ELIGIBLE EMPLOYEES
E xcept as noted below, the ADP/ACP test must include all employees who were eligible to participate in the
plan at any time during the plan year being tested, including those who terminated during the year and those
who elected not to participate. Testing compensation should be provided for all employees who met the
eligibility requirements of the plan and entered the plan according to the plan’s entry date provision. This
would include employees who met the eligibility requirements and reached an entry date but chose not to
defer. These employees would be included in the ADP/ACP test at zero percent.
Return to the Table of Contents.
B. COLLECTIVELY BARGAINED EMPLOYEES
A Collectively Bargained plan is a plan (or portion of a plan) that is maintained pursuant to a
collectively bargained agreement. Special coverage and nondiscrimination testing rules are applicable.
Collectively bargained employees must not be included in the same nondiscrimination test with
non-collectively bargained employees. If your plan covers both collectively bargained and non-collectively
bargained employees, separate ADP tests must be performed for each group.
ecause of this requirement, correct identification of collectively bargained employees is critical to completing
B
an accurate test. This is typically done by setting the employee’s division/location code or a special collectively
bargained identifier on our recordkeeping system. These codes need to be provided for all eligible collectively
bargained employees, not just those who participate in the plan.
s always, please work with your Client Service Representative to review your plan’s data needs and the
A
method of data collection.
Return to the Table of Contents.
C. LOCATION CODES
If employees are tested by location (e.g., multiple employer plans), it is critical to the accuracy of each test
that all employees be identified with the correct location code. Employees with incorrect location codes will
not be tested with the correct population and this could impact the overall test results. Please work with
your Client Service Representative to ensure all employees are identified with an accurate location code.
Return to the Table of Contents.
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D. EXCLUDABLE EMPLOYEES
Plans are allowed to disregard certain employees when identifying who must be taken into account to determine
whether the plan satisfies the coverage tests under IRC section 410(b) and certain non-discrimination tests under
section 401(a)(4) regulations. In general, an employee is excludable if the employee falls into any of the following
categories: (1) the employee fails to satisfy the plan’s minimum age and service requirements for initial eligibility
to participate (or re-eligibility following re-employment), (2) the employee is a collective-bargained employee, (3)
the employee is a nonresident alien without U.S. source income, or (4) the employee is a participant in the plan,
is no longer employed by the employer as of the last day of the plan year, does not have more than 500 hours of
service for the year, and fails to benefit under the plan for the plan year.
Return to the Table of Contents.
E. EARLY PARTICIPATION RULE
Plans are allowed to exclude employees who are under age 21, or have not yet completed a full 12 months of
service or who have never worked 1,000 hours during any plan year (the “statutory minimum”). Today, most
plans have less restrictive eligibility requirements, often making employees eligible as soon as they are
employed, or after completing only a few months of service.
If your plan does not impose the most restrictive eligibility requirements allowed by law, ADP/ACP tests may
still exclude any NHCEs who have not met those requirements, even though they are able to participate in the
plan. Since recently hired employees and those under age 21 typically have lower-than average deferral rates,
it is often advantageous to exclude this group from testing.
In performing your ADP/ACP tests, Mercer will determine whether this optional rule can improve your test
results, to the extent we can accurately determine this population of excludable NHCEs. If you provide
accurate birth and hire dates to our recordkeeping system for all eligible employees (including those who
do not elect to defer), we will be able to apply this rule to maximum advantage.
Unless the plan document specifies otherwise, and since IRS regulations do not provide guidance in this area,
our standard practice is to exclude any NHCEs who would not have reached age 21 or would not have completed
12 months of service as of the last semi-annual entry date in the plan year (regardless of the plan’s actual
entry dates). For example, in testing for a calendar year plan, we will exclude NHCEs who were not yet age
21 or had not completed 12 months of service as of July 1st of the Testing year.
F. OTHERWISE EXCLUDABLE EMPLOYEES
For plans whose eligibility requirements are more liberal than the IRS maximum age and service requirements,
the plan may be permissively disaggregated into two separate plans – one that tests the Otherwise Excludable
Employees (labeled “Participants who do not meet Statutory Minimum” on the test) and one that tests the
Eligible employees (labeled “Participants who meet Statutory Minimum” on the test). When utilizing the
Otherwise Excludable Employee method for testing, both the ADP/ACP and 410(b) Coverage testing must be
satisfied using identical methodology.
Otherwise Excludable Employees are those who have met the plan’s age and service requirements but who:
• Have not attained age 21;
• Have not completed a Year of Service (i.e., hired in the current plan year, or have never worked 1,000 hours
in any plan year); or
• Terminated in the current plan year, but before reaching age 21 or completing a Year of Service.
Return to the Table of Contents.
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Testing Overview
A. ADP/ACP TEST
E xcept for plans that satisfy a 401(k) Safe Harbor or Automatic Enrollment Safe Harbor (see Safe Harbor Plans
section), ADP/ACP testing is required for all 401(k) plans and for other qualified plans that allow for employee
contributions or employer matching contributions. (Some plans meeting the ADP Safe Harbor requirements
may still require ACP testing.)
T he ADP and ACP tests limit the average contribution percentages of the HCEs, in relation to the average
contribution percentages of the NHCEs. Normally, the ADP (Actual Deferral Percentage) test measures
before-tax salary and Roth deferrals while the ACP (Actual Contribution Percentage) test measures employee
after-tax and employer matching contributions.
See Correct Testing Population section for more specifics.
ow the ADP and ACP percentages are calculated. First, the before-tax and Roth deferrals made for
H
each employee are divided by the employee’s testing compensation to arrive at that individual’s ADP. Each
employee’s ACP is obtained by dividing the total after-tax and matching contributions made to his or her account
by his or her testing compensation. These percentages are then averaged among all NHCEs to determine
the respective ADP/ACP for the NHCE group and among all HCEs to determine the respective ADP/ACP for
the HCE group. Note that, if your plan has a last day and/or hours requirement to be eligible for a matching
contribution, employees who do not meet these requirements may not be included in your ACP test.
P lans that use the current year testing method compare the HCE group averages for the current plan year
against the NHCE averages for the same year. Plans that use the prior year testing method compare the
current year HCE averages against the NHCE averages for the previous plan year.
Your plan can amend to change the current or prior year testing method, but there are some limitations
in doing so. Generally, the amendment should be executed before the end of the year being tested. For
example, if your plan is a calendar year plan, you would need to amend by December 31st of the year
being tested for the change in testing method to be effective for your current calendar year test.
Switching from current year testing method to prior year testing method can only be done if your plan
has used the current year testing method for at least 5 plan years. Conversely, switching from the prior
year method to the current year method can be done anytime.
ow ADP and ACP percentages are limited for HCEs. The HCE group averages for the ADP and ACP
H
tests are compared to the respective NHCE percentages (either for the current plan year or the prior plan
year depending on the testing method specified in the plan document).
The average ADP or ACP for the HCE group must not exceed the greater of:
• The Basic Limit, which is the NHCE average times 1.25; or
• The Alternative Limit, which is the lesser of:
— The NHCE average times 2, or;
— The NHCE average plus 2 percentage points.
Note: The requirement is that the test only pass one of these limits.
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The ACP Test is conducted in the same manner as the ADP Test, taking into account matching contributions
and employee after-tax contributions. The ACP Test is not required for collectively bargained groups. Below is
an illustration that shows the maximum HCE ADP at different levels of NHCE ADP.
NHCE Average
Highest Limit
Maximum HCE Average
0.60%
NHCE Avg. times 2
1.20%
1.80%
NHCE Avg. times 2
3.60%
2.00%
NHCE Avg. times 2 or plus 2
4.00%
4.30%
NHCE Avg. plus 2
6.30%
7.50%
NHCE Avg. plus 2
9.50%
8.00%
NHCE Avg. plus 2 or times 1.25
10.00%
9.20%
NHCE Avg. times 1.25
11.50%
ote: In certain cases regulations allow “shifting” or “borrowing” contributions from the ADP test to the ACP test
N
or vice-versa, to improve the ACP test results. For example, if the ADP test passes but the ACP test fails, we may be
able to improve the result by including some before-tax deferrals in the ACP test instead of the ADP test. If your plan’s
matching contributions are immediately vested and meet the other requirements for QMACs (see Other Correction
Methods), we may likewise be able to improve your ADP results by including some matching contributions in the
ADP test.
Failed ADP/ACP tests. If the average ADP or ACP for the HCE group exceeds both the Basic and the Alternative
Limits, then the ADP/ACP test fails and corrections must be made as specified in the provisions of your plan
document. If your plan allows catch-up contributions for employees who have reached age 50, then any excess
amounts for HCEs who are eligible for catch-up will be recharacterized as catch-up contributions instead of being
distributed, unless they have already reached the catch-up dollar limit in effect for the year (see Four-Year COLA
Summary). The following correction methods are permitted in the regulations:
1.Returning excess contributions (adjusted for investment gain or loss) to the HCEs who received the highest dollar
amount of contributions (see DEMO Part III - Correction Summary). Under this correction method the plan sponsor
may incur a penalty tax equal to 10% of the total excess contributions, prior to gain/loss adjustment, on any
distributions made (see Correction Period section and Important Dates and Deadlines section), or
2.Recharacterizing excess before-tax contributions as after-tax contributions (if after-tax contributions are allowed
under the terms of the plan). Under the after-tax recharacterization method, before-tax deferrals become subject
to taxation in the year they would otherwise have been distributed. Instead of being distributed as ROEs, they
remain in the plan as after-tax contributions (see Important Dates and Deadlines). This correction method is only
allowed within 2½ months after the end of the Plan Year being tested, or
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3.Depositing a Qualified Non-Elective Contribution (QNEC) or Qualified Matching Contribution (QMAC) in the plan
for all NHCEs. This correction method is typically available for plans using the current year testing method.­
Note: If the ADP or ACP test fails, corrections must be made within 12 months after the end of the plan
year being tested. Failure to correct a failed test in a timely manner jeopardizes the plan’s qualified status
and may require additional corrections and communications to the IRS under the Employee Plans Compliance
Resolution System (EPCRS). At a minimum, correcting a failed test after the 12-month deadline will likely
require the employer to make additional QNEC contributions to the plan for NHCEs.
ggregating separate 401(k) plans. If your company (or Controlled Group of companies) sponsors more
A
than one 401(k) plan, you may have the option of aggregating the plans for purposes of ADP/ACP testing,
as long as the plans have the same plan year and use the same testing method (current-year/prior-year). This
means that two or more plans may be tested as though a single plan covered all their eligible employees.
This may work to your advantage – for example, if one plan fails the ADP test but another plan passes,
aggregating the two tests may produce a more favorable result for the failing plan.
S eparate 401(k) plans sponsored by the same company or Controlled Group may also be aggregated for
410(b) coverage testing (see next page). Often, multiple plans must be combined and treated as a single
plan in order to meet Minimum Coverage requirements – in that case, the ADP/ACP tests for the plans must
also be run on an aggregated basis. You may make a different decision about aggregating plans or testing
them separately for each plan year, but for any given plan year the plans must be treated the same way in
both ADP/ACP and 410(b) coverage tests.
For this reason, it is critical that you inform Mercer of your inclusion in a Controlled Group or Affiliated
Service Group. Failure to provide this information could result in delayed and/or inaccurate test results.
See Scenarios that May Affect Your Test Results for more information.
Return to the Table of Contents.
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A N N U A L N O N D I S C R I M I NATION TESTING
B. 410(b) MINIMUM COVERAGE TEST
T he IRS requires that a minimum number of Non-Highly Compensated Employees be covered under a qualified
plan. Section 410(b) of the Internal Revenue Code prescribes a Ratio Percentage test to determine if the
percentage of NHCEs covered under the plan is adequate in comparison to the percentage of HCEs who
are covered. This test must be run separately with respect to each of the following contribution types:
• Employee before-tax deferrals (including Roth);
• Matching contributions and employee after-tax contributions;
• Profit sharing contributions or any other employer contributions.
RATIO PERCENTAGE TEST
The 410(b) Ratio Percentage test takes into account all employees who received compensation for services
during the testing year, including all employees of any other companies that belong to the same Controlled
Group or Affiliated Service Group (see Scenarios that May Affect Your Test Results). As with all of the testing
services provided by Mercer, coverage testing is performed only for plans that are record-kept at Mercer. If
your company is a member of a Controlled Group that has additional plans not record-kept at Mercer, please
keep in mind that the results provided to you may need to be aggregated with the data provided from the
other recordkeeper
In addition to employees who were eligible for your plan during the year, if your company (or other companies
in the same Controlled Group) employed any of the following types of employees and they were excluded
from your plan, then the number of excluded employees in each group (as well as the number who
were HCEs for this plan year) will need to be provided in order for us to complete your 410(b) test.
1.Leased employees who had worked full‑time for at least one year.
2.Employees in any company or division that were excluded from participation in your plan.
3.Any other group of employees who were ineligible for the plan for reasons other than the plan’s
minimum age and service requirements, or because of their status as collectively bargained employees
or non-resident aliens.
If your plan fails the ratio percentage test, the use of special methods such as Average Benefits testing may
be required to meet the 410(b) requirements. If your plan does not appear to pass Ratio Percentage testing,
based on the data available to us, your Client Service Representative will contact you to discuss what
additional data or special testing may be required.
Qualified plans are expected to be designed to meet Minimum Coverage requirements, so the regulations
do not prescribe specific methods of correction if the 410(b) test fails. Any indication that your plan may
not meet these requirements should be discussed with your legal counsel to determine an appropriate
remedy. Generally this would involve a plan amendment allowing additional employees to participate in
the plan or contributing additional employer contributions to the plan.
Return to the Table of Contents.
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A N N U A L N O N D I S C R I M I NATION TESTING
AVERAGE BENEFITS TEST
A plan sponsor may satisfy IRC Section 410(b) by either passing the ratio percentage test or the average
benefits test (ABT). If a plan fails to satisfy 410(b) using the ratio percentage test, then satisfying the test
on an average benefit basis can be applied if allowed by the plan. The average benefits test may also be a
very useful too when used in conjunction with the General Test under 401(a)(4) as it can provide for lower
passing thresholds.
The average benefits test is comprised of two tests, both of which must be satisfied: the Nondiscriminatory
Classification Test and the Average Benefits Percentage Test (ABPT).
NONDISCRIMINATORY CLASSIFICATION TEST
A plan will pass the Nondiscriminatory Classification Test if the group of employees benefiting under the
plan is a classification of employees that is both “reasonable” and “nondiscriminatory.”
AVERAGE BENEFITS PERCENTAGE TEST (ABPT)
The ABPT generally compares the total benefits provided to the all the NHCEs from all the plans of the
employer to the total benefits provided to all HCEs from all the plans of the employer.
C. SECTION 415 ANNUAL ADDITIONS TEST
The Section 415 annual additions test is conducted on an individual participant basis, and all qualified retirement
plans are subject to this test.
nder Section 415 of the Internal Revenue Code, the total annual additions to each participant’s account
U
for any Limitation Year cannot exceed the lesser of 100% of Section 415 compensation or the dollar limit
indicated in the Four-Year COLA Summary. Annual additions include all employee and employer contributions
and any forfeitures reallocated to a participant’s account. Annual additions do not include catch-up contributions
or rollover contributions.
here employees participate in more than one plan sponsored by the same or related employers, contributions
W
made to all such plans must be taken into account in applying these limits.
Plan sponsors should be monitoring their employees annual additions limits to ensure that excess contributions
are not made. If a participant’s annual additions exceed the maximum limit, correction should be made in
accordance with your plan document as available under the EPCRS program. Any correction to participant
allocations should be made as soon as possible after the excess has been identified, but no later than 12
months after the end of the plan year being tested.
Return to the Table of Contents.
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A N N U A L N O N D I S C R I M I NATION TESTING
D. TOP HEAVY TEST
S ection 416 of the Internal Revenue Code defines a Top Heavy plan as one in which more than 60% of total
plan assets are allocated to the accounts of Key Employees. All qualified plans, other than some of those
meeting safe harbor requirements, are subject to Top Heavy testing.
The Top Heavy determination made at the end of a plan year establishes whether or not your plan is considered
Top Heavy for the next plan year.
Top Heavy plans are subject to minimum vesting and contribution standards. Many plans, whether or not
they are Top Heavy, already have a vesting schedule that meets the minimum vesting standards. If your plan
is determined to be Top Heavy for the next plan year, you should implement the minimum vesting schedule
as soon as possible. You will also be required to make a minimum employer contribution on behalf of all
Non-Key Employees for that year if your employer contributions to the plan do not already satisfy this requirement.
IRC Section 416(g)(4)(H) allows for a safe harbor plan, whether under a regular safe harbor arrangement or
QACA safe harbor arrangement (see the SAFE HARBOR PLANS section of this manual), to be deemed non-topheavy even though the top heavy ratio as of the last day of the previous plan year was greater than 60%.
A safe harbor 401(k) plan is deemed to be non-top-heavy if the plan satisfies the ADP safe harbor requirement
with a safe harbor nonelective contribution and no other contributions or forfeiture allocations are made for
the plan year or, if matching contributions are made in lieu of a safe harbor nonelective contribution or in
addition to a safe harbor nonelective contribution, all of the matching contributions satisfy the ACP safe
harbor requirements and no other contributions or forfeiture allocations are made.
The requirements for the deemed top heavy exception are applied on a year-to-year basis. For example, if the
top paid ratio is found to be greater than 60% as of the last day of the 2012 plan year, the plan is considered
top heavy for the 2013 plan year. In order to be deemed non-top-heavy and not need to meet the top heavy
minimum contribution requirements for the 2013 plan year, the requirements above must be met in the 2013
plan year. In addition, the safe harbor requirements must be satisfied for the entire plan. For example, if otherwise
excludable employees do not receive the safe harbor contribution during the plan year because the safe harbor
match requires a year of service, the entire plan is not considered a safe harbor plan and the plan would not
be “deemed” to pass top heavy testing. Precluding HCEs from receiving the safe harbor contribution does
not trigger the top heavy requirements.
Return to the Table of Contents.
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Compliance Testing Manual
A D D I T I O N A L T E S T I N G T HAT MAY BE REQUIRED
A. 401(A)(4) GENERAL TEST
Code Section 401(a)(4) requires a qualified plan that features employer contributions to show that it does
not discriminate in favor of highly compensated employees as to contributions or benefits. Employer allocations
(other than matching) that do not use a uniform 401(a)(4) Safe Harbor allocation formula, must pass the
General Test of Code Section 401(a)(4) to prove the allocation is not discriminatory.
TESTING METHODS
Defined contribution plans (such as 401(k) plans) generally pass by showing that they do not discriminate
as to contributions. Defined benefit plans generally pass by showing that they do not discriminate as to
benefits. However, a qualified plan may use either test, and it is sometimes advantageous for a defined
contribution plan to use the benefits test.
CONTRIBUTION TESTING
The employer contributions allocated under a defined contribution plan are nondiscriminatory in amount for
a plan year if each rate group under the plan satisfies section 410(b). A rate group exists under a plan for
each HCE and consists of the HCE and all other employees in the plan (both HCEs and NHCEs) who have an
allocation rate greater than or equal to the HCE’s allocation rate. Thus, an employee is in the rate group for
each HCE who has an allocation rate less than or equal to the employee’s allocation rate.
CROSS-TESTING
Treas. Reg. 1.401(a)(4)-8 provides rules for testing defined contribution plans on a benefit basis (similar to
a Defined Benefit plan). This method may be a helpful tool for plans that cannot pass General testing on a
contribution basis.
B. 401(A)(4) BENEFITS, RIGHTS & FEATURES TEST
The benefits, rights and features (BRF) of a plan are subject to the nondiscrimination requirements of IRC
Section 401(a)(4). Specifically, optional forms of benefits, ancillary benefits and other rights or features are
subject to testing under 1.401(a)(4)-4. For example, rates of match are defined as an other right or feature
that is subject to such testing. The BRF test requires that a BRF must satisfy a current availability requirement
and an effective availability requirement.
CURRENT AVAILABILITY
The current availability requirement is satisfied if the group of employees to whom the BRF is currently available
satisfies the Nondiscriminatory Classification Test of Section 410(b).
EFFECTIVE AVAILABILITY
The effective availability requirement is satisfied if the BRF, based on all of the relevant facts and circumstances,
does not substantially favor HCEs. It is possible that a BRF could be structured in such a way that the current
availability requirement is satisfied, but only HCEs ever actually qualify to receive the benefit. In those cases
the effective availability requirement is not satisfied.
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A D D I T I O N A L T E S T I N G T HAT MAY BE REQUIRED
Examples when BRF testing may be required:
• Rates of matching contributions vary among participants (i.e. age or service based match, or different
formulas for different locations or classifications)
• Types of benefits that are not available to all employees (i.e. plan loans or distribution options that are
available only to certain groups of employees)
• The ability to make a certain type of contribution that is not available to all participants (i.e. after tax
contribution availability for only certain employees)
C. IRC SECTION 414(S) COMPENSATION TESTING
This test should be run to illustrate the definition of Compensation that is being used by the plan is not
discriminatory in favor of the HCEs. Any definition of compensation satisfying Internal Revenue Code (IRC)
415 (c )(3) automatically satisfies the nondiscriminatory requirement.
If a plan excludes certain forms of compensation (such as bonuses, commissions, or overtime) this test may
need to be performed. It requires that the average of the ratio of plan compensation for the HCE group
be not more than a deminimus amount higher than the average of the ratio of plan compensation to total
compensation for the NHCE group. The IRS has used 3% as a safeguard, but each plan is viewed on a
facts and circumstances basis.
A 414(s) test would be required in the following situations:
• a) a non-safe harbor definition of compensation for ADP/ACP or 401(a)(4) nondiscrimination testing .
• b) a non-safe harbor definition of compensation for allocating matching contributions intended to be a
401(k) Safe Harbor plan
• c) a non-safe harbor definition of compensation for calculating profit sharing allocations
1A
plan’s definition of compensation from which employees are allowed to defer, or the compensation used for allocating normal matching
contributions, does not require 414(s) testing as long as the ADP/ACP compensation used to test the deferrals and match meets the
definition of 414(s).
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A N N U A L N O N D I S C R I M I NATION TESTING
Scenarios that May Affect Your
Test Results
Below are examples of corporate actions and other scenarios that may occur during a plan year and may
impact your annual testing. The effect of these on your testing may be seen in the year of the transaction
as well as in future years.
A. MERGERS, ACQUISITIONS, SPIN-OFFS, AND OTHER WORKFORCE CHANGES
If a significant number of employees enter or leave the plan through a company merger, acquisition, or
spin-off, this may have an impact on your test results. The number of employees, their rates of deferral, their
account balances, and the HCE/NHCE breakdown could all have an impact on any or all of the tests being
performed in the current year or in future years. Other changes to the workforce, such as layoffs or early
retirement programs, may also make a significant difference in testing, particularly if HCEs are involved.
uestions often arise as to the appropriate method of defining HCEs when companies have acquisitions or spin
Q
offs or about whether 401(k) plans that merge into or spin off from a parent company’s plan may still be
tested as part of that plan for the year in which the change occurs. Mercer’s Reporting & Testing Specialists
are available to discuss your testing options in such situations; however, because IRS guidance in this area
is limited, you should also seek advice from legal counsel to be sure you are giving us appropriate instructions
on testing your plan.
Return to the Table of Contents.
B. PLAN AMENDMENTS OR DISCRETIONARY CHANGES
Changes to your plan may also affect your test results. Changes to eligibility requirements and match formulas
are two of the most common changes that could impact your test results but there are others. Please contact
your Client Service Representative if you have any questions regarding any amendments to your plan.
Return to the Table of Contents.
C. CONTROLLED GROUP STATUS
If your company is a member of a Controlled Group or Affiliated Service Group, you must inform Mercer, as
there may be an impact to your testing services. In this situation, please keep in mind that the test results
provided to you may not be final results, as they may need to be aggregated with that of the other members
of the Controlled Group or Affiliated Service Group.
If your company becomes a member of a Controlled Group during the plan year, your Minimum Coverage
test and your ADP/ACP tests may be impacted. The rules surrounding Controlled Groups are complex.
Although Mercer cannot make the determination as to your Controlled Group status, some of the ways your
company may become a member of a Controlled Group are noted below.
• Your company acquires another company in whole or in part.
• Your company is acquired in whole or in part by another company.
• There is a change in the percentage of common ownership between your company and another entity.
• There is a change in the percentage of ownership in your company by another entity.
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A N N U A L N O N D I S C R I M I NATION TESTING
Generally, all members of a Controlled Group are considered when performing your nondiscrimination testing.
Companies within a Controlled Group may be tested separately for nondiscrimination purposes only if they
meet certain Minimum Coverage requirements, taking into account the entire employee population of the
Controlled Group.
If your company becomes a member of a Controlled Group during the plan year and other members of the
Controlled Group also maintain qualified retirement plans for their employees at other service providers, all
plans may need to be tested together. In addition, if employees of a member of the Controlled Group are
not covered by any plan, those employees will impact the results of the Minimum Coverage test. If you know
that your company became a member of a Controlled Group during the plan year, please notify your Client
Service Representative. If you are unsure whether your company is part of a Controlled Group, please contact
your controller, tax preparer, or legal counsel.
T hese rules may also apply if a new member joins a current Controlled Group during the plan year. Therefore,
if your company is already part of a Controlled Group and a new member joins, your testing may be affected.
Return to the Table of Contents.
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A N N U A L N O N D I S C R I M I N ATION TESTING
Four-Year COLA Summary
Qualified Plan Limits
2013
2012
2011
2010
401(k) Limit (402(g))
$17,500
$17,000
$16,500
$16,500
Catch-Up for 401(k)
5,500
5,500
5,500
5,500
51,000
50,000
49,000
49,000
Maximum
Compensation
Limit 401(a)(17)
255,000
250,000
245,000
245,000
Highly Compensated
Employees
Compensation
Threshold
115,000*
115,000*
110,000*
110,000*
Key Employees
and Officers
Compensation
165,000
165,000
160,000
160,000
A More Than 1%
Owner
150,000
150,000
150,000
150,000
Taxable Wage Base
113,700
110,100
106,800
106,800
DC – Annual
Contributions (415)
* F or example: The compensation limit from the prior year applies to the current testing year. Therefore, an employee
who earned $114,000 in 2011 would be an HCE for the 2012 testing year. However, an employee who earned
$114,000 in 2012 would not be an HCE for 2013, since the HCE compensation limit that must be earned in 2012
to be an HCE in the next testing year (2013) is $115,000.
Return to the Table of Contents.
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Compliance Testing Manual
SAFE HARBOR PLANS
An effective way of minimizing a 401(k) plan’s annual nondiscrimination testing is to adopt a 401(k) safe harbor
provision under the plan. A plan that makes either a safe harbor match or a safe harbor profit sharing contribution
and meets the traditional 401(k) safe harbor or Qualified Auto Enrollment (QACA) requirements may be relieved
of the need to perform ADP and/or ACP tests and may automatically satisfy Top Heavy requirements.
Safe Harbor Matching Contributions. A plan meets the safe harbor requirements if matching contributions
are made on behalf of every Non-Highly Compensated Employee, the rate of matching does not increase as the
rate of deferrals increases, Roth and Catch-up contributions are not excluded from receiving match, and the rate
of match for HCEs is not greater than the rate of match for NHCEs at each level of employee contribution. In
order for the plan to also be considered ACP safe harbor, employee contributions of greater than 6% of pay
cannot be matched.
Safe Harbor matching contributions must be equal to the following. Other, equivalent formulas can satisfy the
matching safe harbor, too, but only if, and so long as the amount of matching contributions at each rate of
deferral is at least equal to the amount that would be made if the basic formula were used.
• 4
01(k) Safe Harbor: 100% of the first 3% contributed by the participant, plus 50% of the next 2% for
a maximum match of 4%.
• Q
ACA: 100% of the first 1% contributed by the participant, plus 50% of the next 5% for a maximum match
of 3.5%.
Safe Harbor Profit-Sharing Contributions. A plan can also meet the 401(k) safe harbor requirements if the
plan requires the employer to make a non-elective profit-sharing contribution equal to at least 3% of 414(s)
compensation on behalf of every eligible NHCE, regardless of whether the NHCE has made any before-tax elective
deferrals or after-tax contributions.
Additional Discretionary Contributions. Additional discretionary matching contributions may also be made to
a 401(k) safe harbor plan. In order to escape ACP testing, discretionary match is limited to 4% of compensation,
cannot match deferrals over 6%, cannot increase as deferral rates increase, and cannot have an hours or last
day requirement. Depending on allocation formulas, discretionary matching contributions may require a Benefits,
Rights and Features test. A plan may also contribute discretionary profit-sharing contributions which are permitted
to have a 1000 hour and/or last day requirement. Additional discretionary contributions may be subject to a
vesting schedule.
Compensation. The compensation used in the calculation for either the match or the employer non-elective
profit sharing contribution must fall within the definition of 414(s) compensation.
After-Tax. After-tax contributions are always subject to ACP testing, even if all other safe harbor provisions are met.
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Compliance Testing Manual
SAFE HARBOR PLANS
QACA Automatic Enrollment for a QACA plan, employees must initially be automatically enrolled at 3% of pay or
greater up to the last day of the plan year following the plan year to which the automatic enrollment applied. For
the subsequent next three plan years, the default rate may not be less than 4%, 5% and 6% respectively. Going
forward, the default rate may not be less than 6% but not more than 10%.
Notice requirement. A plan can only meet the safe harbor requirements for a certain year if all eligible
employees are given an accurate, understandable, written notice of their rights and obligations under the plan,
within a reasonable period before the beginning of the plan year. For QACA plans, the notice must also explain
the right to opt out and how contributions will be invested in the absence of participant direction. In addition,
employees must have a reasonable amount of time to make contribution and investment elections before the
first contribution is made.
Vesting requirements. Under a traditional safe harbor plan, any contributions used to satisfy the safe harbor
requirements must be 100% vested immediately. For QACA plans, both matching and non-elective auto enrollment
safe harbor contributions are subject to a 2-year or less vesting requirement.
Withdrawal restrictions. All safe harbor contributions are subject to withdrawal restrictions. Like elective deferrals,
they must not be distributed from the plan prior to age 59½ unless the participant severs from employment or
certain other circumstances are met. Safe harbor contributions must also not be available for hardship withdrawal
prior to age 59½.
Note: Operating a safe harbor plan requires a written amendment to the plan document. Although a plan may
contain the required features of the safe harbor plan design, the document must state that the plan is a safe
harbor plan. In addition, safe harbor plans are not exempt from the 415 Annual Additions test or the 410(b)
Minimum Coverage test. If certain requirements are met, a safe harbor plan may be deemed to be not top heavy.
See the TOP HEAVY TEST section of this manual. See the ADP/ACP TESTING COMPENSATION section for more
information on 414(s) compensation.
Return to the Table of Contents.
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E L I G I B L E A U T O M AT I C C ONTRIBUTION ARRANGEMENT (EACA)
In order to meet the requirements for an Eligible Automatic Contribution Arrangement that would allow for a
6 month period to process ADP/ACP return of excesses without incurring the 10% excise tax penalty, your plan
would have had to implement all of the provisions below prior to or on the first day of the plan year for which
the EACA applies.
a. A
uto Enrollment at a uniform percentage of pay with the ability to opt out for all new AND existing
participants who had not previously completed an enrollment form
b. A
ll employees covered under an EACA for the plan year should be provided with an adequate initial notice
of the auto enrollment provisions within a reasonable time prior to the plan year to which the EACA is
applicable or, for those employees who become eligible during the plan year, the notice may be provided
within a reasonable time before the employee becomes eligible.
c. F or plan years beginning on or after 1/1/2010, amended your plan document for the automatic enrollment
feature by the end of the plan year for which the EACA applies. For plans that implemented an EACA
effective on or after 1/1/2008, the plan should have been amended by the end of the 2009 plan year.
If your plan meets all of the requirements above, and your ADP/ACP testing fails, you now have until 6
months into the new plan year (vs. the previous 2½ months) to process returns of excess to your Highly
Compensated Group before you are subject to a 10% excise tax on the amount of the returns. However, a
plan may designate a certain group(s) of employees to be covered under an EACA or EACA’s which may
not result in all eligible employees having been covered by the EACA for the full plan year (or the portion of
the plan year that the employees are eligible). If this was the case, the plan would only have 2 1/2 months
after the plan year end to process any ADP/ACP returns of excess without having to pay the 10% excise
tax. Compliance with final rules for EACAs is effective for 2010 plan years and later. Good faith compliance
with the proposed regulations or final regulations is required if an EACA was implemented on or after 1/1/2008.
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S H O RT P L A N Y E A R S A N D THE IMPACT ON TESTING
Short plan years may occur in a number of situations including when a new plan is established, when a plan
amends its plan year, when a plan is terminated, or when a plan merger takes place.
Determining Highly Compensated
Employees
Highly Compensated Employees (HCEs) are determined on the basis of Section 415 compensation (as
defined by the plan) earned for the 12‑month period preceding the plan year being tested (unless the plan
has an off-calendar plan year and adopts a special election to define its HCE group based on calendar-year
415 compensation). The HCE group for a short plan year is determined as usual, based on 415 compensation
earned in the prior 12-month period. In addition, the HCE group for the plan year following the short plan
year must still be based on 415 compensation for the previous 12 months, not just the previous short plan
year period.
For example, assume a plan is being amended from a 10/31 plan year-end to a 12/31 plan year-end. The
period from 11/1 to 12/31 becomes a short plan year. When determining HCEs for the short plan year, 415
compensation from 11/1 to 10/31 will be used. For the next plan year, 415 compensation from 1/1 to 12/31
will be used to determine the HCE group.
The same is true when a new plan is established. Assume a new calendar-year plan is created with an effective
date of 5/1. The period from 5/1 to 12/31 is a short plan year. Compensation used to determine HCEs will
be 415 compensation paid from 5/1 to 4/30, i.e., the 12-month period prior to the effective date of the plan
year. Note that for the first plan year, even though a plan may actually have been in existence for less than
12 months, the plan document could provide for an effective date such that the first plan year would be
considered a 12-month period. In the example above, if the calendar plan year was established on 5/1 with
an effective date of 1/1, the 12-month period for reviewing 415 compensation would be 1/1 to 12/31, i.e.,
the calendar year prior to the effective date of the first plan year. Please note, there are administrative and
drafting concerns that need to be addressed prior to implementing this strategy.
Annual Limits Must Be Prorated
Some annual limits used in testing must be prorated for short plan years. These include the 401(a)(17)
Annual Compensation Limit and the 415 Annual Additions Limit. (View the Four-Year COLA Summary for
specific annual limits.) For example, the 2013 Annual Compensation Limit when determining plan calculations
is $255,000. This limit must be prorated for a short plan year. Using the example from above with a plan
year beginning on 5/1/12 and ending on 12/31/12, the maximum compensation to be used is $170,000
($255,000/12) X 8; the number of months in the plan year being tested).
The Annual Additions Limit for a short plan year would be determined in the same way. To determine the
applicable limit for the short plan year, divide the annual limit by 12 and then multiply by the number of
months in the short plan year.
Because the 402(g) Deferral Limit and the 414(v) Catch-up Limit are always applied on a calendar-year basis,
these limits do not change for a short plan year. Likewise, the compensation threshold for HCEs is not prorated
since it is always based on a 12-month period. However, in the absence of specific guidance, the compensation
limit for determining Key Employees may be prorated.
Return to the Table of Contents.
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Compliance Testing Manual
I M P O RTA N T D AT E S A N D DEADLINES
Correction Timing and Penalties
All plans are subject to correcting their ADP/ACP testing failures within 12 months of the end of the plan year
being tested. Failure to do so will result in an operational defect and a more expensive correction method as
outlined in the Employee Plan Compliance Resolution System (EPCRS).
EXCISE TAX PERIOD:
In addition, correction after a certain date following the plan year would result in a 10% excise tax on the
amount of excess contributions and excess aggregate contributions that are distributed by the plan. This excise
tax is imposed on you, the plan sponsor. For plan years beginning on or after 1/1/2008, plans may be subject
to one of two dates for this purpose:
• P lans without an Eligible Automatic Contribution Arrangement (EACA) that covers all eligible employees;
(see Eligible Automatic Contribution Arrangement (EACA))
- If excess contributions and excess aggregate contributions are distributed prior to 2½ months after
the end of the plan year being tested, the plan sponsor is NOT subject to the 10% excise tax.
• P lans with an Eligible Automatic Contribution Arrangement (EACA) that covers all eligible employees;
(see Eligible Automatic Contribution Arrangement (EACA))
- If excess contributions and excess aggregate contributions are distributed prior to 6 months after
the end of the plan year being tested, the plan sponsor is NOT subject to the 10% excise tax.
Form 5330 is required to be filed with the IRS for returns of excess processed after the plan’s applicable
deadline as can be determined above. The 10% excise tax is based on the amount of excess contributions
before any gain or loss is calculated.
In order to make corrective distributions in a timely manner to avoid the 10% excise tax penalty, you will need
to provide Mercer with complete and accurate testing data by specific deadlines that correspond with the
specifics of your plan:
• If you intend to make refunds within the 2½-month deadline, Mercer will need complete and accurate
testing data within 4 weeks from the end of your plan year.
• If you intend to make refunds within the 6-month deadline, Mercer will need complete and accurate testing
data within 4½ months from the end of your plan year.
TAXATION OF EXCESS CONTRIBUTIONS/EXCESS AGGREGATE CONTRIBUTIONS:
This has been changed. Effective for plan years beginning on or after 1/1/2008, excess contributions and excess
aggregate contributions are taxable in the year they are distributed.
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Compliance Testing Manual
I M P O RTA N T D AT E S A N D DEADLINES
The advantages and disadvantages of making corrections within the applicable deadline are outlined below.
If your plan fails the ADP/ACP Test
and you refund excess to HCEs:
Pros
Cons
Within 2½ months (or 6 months
for plans with EACA) after the end
of the plan year being tested
No 10% penalty tax to the plan
sponsor
None
After 2½ months (or 6 months
for plans with EACA), but within
12 months of the end of the plan
year being tested
Meet IRS requirement to correct
within a 12-month period.
Employer must pay penalty tax equal
to 10% of the excess contributions
(excluding gain/loss). This penalty must
be paid using Form 5330, which must
be filed by the end of the 15th month
following the plan year being tested
More than 12 months after the
end of the plan year being tested
None
The plan may lose its tax qualification.
Also, the employer incurs the cost of
additional contributions (QNECs) for
NHCEs, to avoid plan disqualification,
in addition to the 10% penalty on
any excess amounts refunded
Return to the Table of Contents.
25
Compliance Testing Manual
FA I L E D T E S T S
Guide to Correction Methods
Note: All corrections must be authorized by returning a completed Correction Response Form to your Client
Service Representative.
A. ADP/ACP NONDISCRIMINATION TESTING
If the ADP/ACP test fails, the average deferral percentages for HCEs (or in the ACP test, the average contribution
percentages) are too high in comparison with the averages for the NHCEs. The most common correction method
is to return excess amounts to the HCEs who deferred or received the highest dollar amount of contributions.
Investment gain or loss and any related matching contributions must be calculated and distributed with the
excess amounts.
RETURNING EXCESS CONTRIBUTIONS
If correction is made by distributing excess amounts, the following rules govern penalties and tax consequences
of the distributions, depending on when they are made. If any HCEs have already received a distribution of their
entire vested balance before the correction is made, their corrective distributions are considered as having been
completed with that distribution. These HCEs must be notified in writing that the excess contributions are not
eligible for rollover.
Corrective distributions made within 2½ months (or 6 months for plans with EACA) after the testing
year‑end. (see Correction Timing and Penalties)
Corrective distributions made after the 2½-month (or 6 months for plans with EACA) deadline.
(see Correction Timing and Penalties)
Corrective distributions made more than 12 months after the end of the plan year.
• If corrective distributions are not completed within 12 months of the end of the plan year being tested, a
qualification failure will occur and the test must be corrected under the IRS Employee Plans Compliance Resolution
System (EPCRS). This may not require any notification or filing with the IRS; however, it does generally require
making additional 100% vested employer contributions (QNECs or QMACs) to NHCEs, in addition to or instead
of returning excess amounts to HCEs. You should seek legal advice to ensure you meet the Employee Plans
Compliance Resolution System (EPCRS) requirements to avoid the tax consequences or plan disqualification.
GAP PERIOD EARNINGS:
Effective for plan years beginning on or after 1/1/2008, gap period earnings are NOT required to be calculated
on excess contributions and excess aggregate contributions unless required by your plan document. Please indicate
on the Correction Response Form whether or not you want gap earnings calculated on your excess contributions and
excess aggregate contributions.
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Compliance Testing Manual
FA I L E D T E S T S
OTHER CORRECTION METHODS
Two other correction methods are available under the Internal Revenue Code and Regulations as long as
they are provided for in your plan document.
• Additional 100% vested employer contributions may be made to the plan. Your document may permit
Qualified Non-Elective Contributions (QNECs) allocated to all eligible NHCEs, or Qualified Matching
Contributions (QMACs) made only for those NHCEs who deferred for the year. Your document may also
allow for a Targeted QNEC, which would be provided to a smaller number of eligible NHCEs. The amount
of the corrective contribution will depend on the allocation method specified in your plan document.
QNECs and QMACs are usually available as a correction method only if the current-year testing method
is used. In that case, QNECs and QMACs may be made at any time during the plan year following the
year being tested, and are not subject to any penalty. QNECs and QMACs may also be used to improve
test results with the prior-year testing method, but in that case the contributions must be allocated to
the prior-year’s NHCE group, and must be made before the end of the plan year being tested. The timing
of such contributions dictates their deductibility and when they are considered “annual additions” for
Section 415 testing.
• In plans that include non-Roth after-tax employee contributions, the ADP test may be corrected by
recharacterizing the HCEs’ excess before-tax deferrals as non-Roth after-tax contributions, instead of
distributing them to the participant. Since these recharacterized contributions must then be included
in the ACP test, however, this method helps only if the ACP test initially passes with sufficient leeway
to absorb the additional HCE non-Roth after-tax contributions.
Recharacterization must be completed within the 2½ months after the end of the plan year being tested,
or this method cannot be used. The HCEs affected must be notified within this period that the taxable
status of their contributions has changed. The HCEs must include the recharacterized amounts as income
for the taxable year in which falls the date that is 2½ months after the plan year end.
Note: for returning excess contributions under the Puerto Rico Internal Revenue Code (PRIRC), see the
section on Puerto Rico plans later in the manual.
Return to the Table of Contents.
27
Compliance Testing Manual
FA I L E D T E S T S
B. SECTION 415 ANNUAL ADDITIONS LIMITS
In 2007, the IRS provided guidance on the correction of Section 415 violations. Effective on or after 7/1/2007,
all Section 415 violations will be corrected directly through the EPCRS program. Pending the issuance of
further guidance, the IRS will recognize any of the correction methods under former regulation as available
under the EPCRS program, and plans that are eligible for self-correction (SCP) may implement corrections
using the methods in the former regulations. These correction methods also will be permitted under VCP
and Audit CAP.
Please consult your plan document to determine whether corrective distributions of employee deferrals
and after-tax contributions are permitted to correct Section 415 violations, or whether a different method
is specified. No penalty applies, and no specific deadline is given, although it is advisable to make these
distributions before the end of the plan year following the year being tested. If your plan allows corrective
distributions, any pre-tax contributions would be taxable to the recipient as ordinary income for the tax year
in which the distribution is made. An appropriate gain or loss should be allocated and distributed with the
excess amounts.
Any corrective distributions made will be reported to the IRS by Mercer in January of the year immediately
following the corrective distribution on Form 1099-R.
Regulations do not permit distribution of employer contributions to correct these violations. Your plan
document may allow that the excess amounts be held in a suspense account, and then be reallocated
to participants or used to offset future employer contributions in the next plan year.
If any participants have already received a distribution of their entire vested balance before the correction is
made, their corrective distributions are considered as having been completed with that distribution. However,
excess contributions are not eligible for rollover to an IRA or other qualified plan. Any participants with excess
contributions who have taken a distribution of their entire vested balance should be notified by you, the plan
sponsor, in writing.
Return to the Table of Contents.
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Compliance Testing Manual
FA I L E D T E S T S
C. REQUIREMENTS FOR TOP HEAVY PLANS
A plan’s Top Heavy status is determined as of the last day of the prior plan year. However your plan may
already satisfy the minimum vesting and contribution requirements outlined below. If so, no further action
is necessary.
Top Heavy plans must vest all employer contributions at least as rapidly as one of the following schedules:
• Six-year graded vesting – employees become 20% vested after two years of service, increasing 20% per
year thereafter, with 100% after 6 years; or
• Three-year cliff vesting – employees are not vested until they have three years of service, at which point
they become 100% vested.
Your plan document will specify the Top Heavy schedule applicable to your plan. Your plan may have been
amended (to comply with the Pension Protection Act) to one of these schedules as your non-Top Heavy
vesting schedule.
Top Heavy plans must also generally make minimum employer contributions of 3% of plan-year gross
compensation for every eligible Non-Key Employee. The following rules apply:
• If every Key Employee’s total contributions, including deferrals, are less than 3% of compensation, then
the required minimum contribution for all Non-Key Employees is reduced to the highest percentage
for any Key Employee. No minimum contribution is required for a plan year in which no deferrals or
contributions are made for any Key Employee.
• Some employer contributions already made can be used to satisfy the 3% minimum requirement. For
example, if you make profit sharing contributions of 3% or more every year, for all Non-Key Employees,
no additional contributions are needed. Reallocated forfeitures and company matching contributions
may also be counted toward the minimum, but participants’ own contributions may not.
• Minimum contributions must be made for all Non-Key Employees who were eligible for the plan, and
were still employed at the end of the plan year even if they did not work enough hours during the year
to receive a normal employer contribution. Employees who terminated before the end of the plan year
are not required to receive a minimum contribution. Key Employees may also receive these contributions.
The contribution must also be made within the normal deductibility and annual addition rules.
• If you have more than one plan covering the same employees, Top Heavy minimum contributions are
required in only one plan – so long as they are made for each Non-Key Employee who was employed
at year-end. Check your plan documents to determine to which plan the contribution must be made.
Return to the Table of Contents.
29
Compliance Testing Manual
FA I L E D T E S T S
D. CATCH-UP CONTRIBUTIONS
P lan sponsors are able to offer participants age 50 or older the opportunity to make catch-up contributions
(see Four-Year COLA Summary). Catch-up contributions are not included in calculating the ADP for individual
employees and are therefore not included in the ADP test. For HCEs who have not reached the catch-up
limit but have excess deferrals due to a failed ADP test, regulations require the excess to be recharacterized
as catch-up contributions up to the annual limit.
If your plan allows catch-up contributions, any excess deferrals over a regulatory or plan-specific limit must
be treated as a catch-up contribution for employees who meet the age requirement and have not
already reached the annual catch-up limit.
Because catch-up contributions based on the 402(g) annual limit on deferrals are determined on a calendaryear basis, regardless of the plan year, catch-up tracking is greatly simplified for plans that do not impose
plan-specific deferral limits on members (or where the deferral limit is so high that no employees will reach it).
Where plans do impose plan-specific deferral percentage limits (on all participants or only on HCEs), those
limits must be calculated on a plan-year basis as of the last day of the plan year. For plans with off-calendar
plan years this complicates matters considerably, since catch-up calculations must take into account limits
imposed both on a calendar-year and a plan-year basis. If you are transmitting contributions to Mercer
pre-coded as catch-up contributions, they will be reflected as such on our recordkeeping system. However,
be aware that we may need to recharacterize some contributions as of the end of your plan year to comply
with regulations.
If your plan allows for catch-up contributions, Mercer will calculate the correct catch-up amounts for participants
based on regulatory and plan-specific limits, in order to ensure the correct amounts are excluded from testing.
If your plan limits deferrals (either for all employees or for HCEs only) to a percentage of compensation less
than 75%, please be sure you are providing us with the compensation amounts on which these deferral
limits are based (read about Deferral Compensation). If we do not receive separate Deferral Compensation
amounts for your plan, we will assume the deferral percentage limit is based on the same compensation
used for ADP/ACP testing.
If the ADP test fails and your plan allows for catch-up contributions, Mercer will automatically recharacterize
any excess contribution amounts for catch-up eligible HCEs as catch-up contributions, to the extent those
deferral amounts have not already reached the catch-up limit in effect for the calendar year in which the
plan year ends.
Return to the Table of Contents.
30
Compliance Testing Manual
I N T E R I M N O N D I S C R I M I NATION TESTING
One of the benefits of interim ADP/ACP testing is that it assists plan sponsors in forecasting future test
results and identifying potential failures at year-end. This may allow you to make adjustments throughout
the remainder of the plan year to avoid a failure at year-end or to notify your HCEs of the possibility of a
corrective refund. It also can help to identify opportunities for HCEs to defer a higher percentage of their
salary if there is a cap currently in place that is limiting their level of deferrals. Finally, interim testing can
help to identify and resolve data issues earlier in the year that would otherwise delay delivery of your
year-end test.
As a reminder, Top Heavy and 410(b) Minimum Coverage Testing services are performed only at the end of
each plan year. However, we do provide an interim Section 415 report for your review.
A. COMPENSATION FOR INTERIM TESTING
Compensation provided should be based on the defined testing period. For example, if the last contribution
to be included in the test is for the payroll period ending June 30, please provide compensation through that
payroll period. We recommend submitting compensation through the end of a month in order to produce the
most accurate results. Please see the explanation on how compensation and contributions are projected below.
The compensation used in nondiscrimination testing is defined in your plan document. Generally, total taxable
compensation must be used in testing, but certain non-taxable items may be included. Specifically, beforetax salary deferrals into a 401(k) plan or Section 125 plan may be included in this compensation if allowed
under your plan. Be sure to check your plan document to determine the compensation to be used for your
test (see Compensation section).
If bonus compensation or any other nonrecurring compensation has been paid to employees and is included
in the total compensation amounts provided to Mercer for interim testing, these amounts must also be provided
separately for each employee, along with deferrals on such compensation. Because we will be projecting
compensation and contributions based on amounts provided, we must be aware of any nonrecurring
compensation so that we do not overstate the projected year‑end compensation, which could impact the
results of your test.
Note: For employees who were newly eligible during the current plan year, your plan document should
specify whether to include their compensation for the entire plan year, or only for the period during which
they were eligible to participate. For example, assume your plan includes compensation only for the period
during which they were eligible to participate. If your plan provides for quarterly entry dates and an employee
enters the plan on April 1st, the compensation provided should include compensation from April 1, through
the testing period end date. This will provide a higher average deferral percentage than if compensation from
the beginning of the plan year were provided and may improve your test results. Also, any employee with no
compensation for the plan year may be excluded from the tests.
Return to the Table of Contents.
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Compliance Testing Manual
I N T E R I M N O N D I S C R I M I NATION TESTING
B. PLAN AGGREGATION
If your company is affiliated with other businesses or is a member of a Controlled Group of companies,
your plan may require that you include any compensation paid to your employees by the other affiliates.
Many requirements of the Internal Revenue Code treat certain affiliated businesses as if they were a single
employer. Also, qualified retirement plans sponsored by the same employer must often be aggregated for
testing purposes, i.e., treated as though they were part of a single plan.
Note: To ensure tests are aggregated or disaggregated in compliance with the regulations, you should review
these requirements with your legal counsel if your company sponsors multiple plans or has significant common
ownership in other companies. If it is determined that your test needs to be aggregated with another plan
that is not record-kept at Mercer, please contact your Client Service Representative.
C. INTERIM TESTING OF MATCHING CONTRIBUTIONS
If your plan funds a matching contribution on an ongoing basis, an ACP test will be performed using the
year‑to‑date matching contributions. If the plan funds matching contributions on an annual basis, no ACP
test will be performed at this time. Please note that “annual” refers to a one-time contribution, and not to
matching contributions that are made on a quarterly, monthly, or ongoing basis.
D. HOW ARE CONTRIBUTIONS AND COMPENSATION PROJECTED FOR INTERIM TESTING?
The method used to project contributions and compensation is simple. A monthly rate is determined by
dividing the year‑to‑date compensation and contributions by the number of months for which compensation
has been submitted. That rate is multiplied by the number of months remaining in the year. This amount
is then added to the year-to-date numbers to attain the projected annual amount. Because we are using
a monthly rate to project compensation and contributions, we recommend submitting compensation as of
the end of a month.
Example: Assume the testing period ends June 30 (6 months):
Interim Data
Compensation
$50,000
$100,000
Deferral
$2,500
$5,000
Return to the Table of Contents.
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Projected Data
Compliance Testing Manual
I N T E R I M N O N D I S C R I M I NATION TESTING
E. WHAT TO DO WITH YOUR TEST RESULTS
Keep in mind that your interim tests results are performed to project your anticipated year‑end results. These
tests are performed based on current data and year-end results may vary if there are changes in population,
contribution rates, or corporate actions. An interim test failure allows you the opportunity to improve your
test results at year-end by making adjustments for the remainder of the year. An interim test failure does not
require correction as year-end failed tests do.
FOR FAILING TESTS:
At year‑end, failed tests are most commonly corrected by returning excess contributions to the HCEs who
had the highest contribution amounts during the year. Keep in mind a failing test indicates that the HCEs
are deferring the maximum amount permitted by law. If your plan is projected to fail at year-end, you may
want to consider the following:
• Eliminating any limit currently imposed on deferrals by NHCEs (and informing NHCEs of this important
change so they can defer more).
• If permitted under your plan, limiting future deferrals by your HCEs for the remainder of the plan year.
• Notifying your HCEs that they may receive a refund of excess contributions after the end of the plan year.
• Addressing any outstanding data issues and assumptions made that could be negatively impacting your
interim test results.
• Improving your test results by making QNECs if your plan uses the current year testing method and
allows for QNECs. If you would like additional information on this topic, please call your Mercer Client
Service Representative.
FOR PASSING TESTS:
If your plan is projected to pass at year-end, you may want to consider:
• If your plan is projected to pass by a comfortable margin (at least 0.75%), increasing any limits currently
imposed on NHCE and HCE deferrals so that participants can contribute additional money.
• If your plan is projected to pass by a small margin (less than 0.75%), addressing any outstanding data
issues and assumptions made that could be negatively impacting your interim test results before the end
of the year.
• Monitoring your plan’s participation rates and continuing to promote the benefits of the plan to those not
currently participating and to any newly hired employees.
Return to the Table of Contents.
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Compliance Testing Manual
P U E RT O R I C O P L A N S
There are special rules that apply when performing annual compliance testing for Puerto Rico plans. Section
1165(e) of the Puerto Rico Internal Revenue Code of 1994 (the PRIRC) was replaced by Section 1801.01 as a
result of the newly established Puerto Rico Internal Revenue Code of 2011 effective January 31, 2011 (“2011
Code”). Section 1801.01 is generally effective as of January 1, 2011 but some provisions become effective
for taxable years starting on or after January 1, 2012. Puerto Rico law does not always coincide with U.S. law.
Some of the basic differences include:
• Definition of Highly Compensated Employees
• Testing Method must be Current Year
• No exclusion of early participants who have completed less than one year of service or are under age 21
• No ACP or Top Heavy testing required
• No 402(g) limits; instead they are subject to limits set forth by the PRIRC; (see chart below)
Plan Year
Pre-tax Contribution Limit
2013 and thereafter
$15,000
2012
$13,000
2011
$10,000
• Effective January 1, 2012, an annual additions limit will apply equal to the lesser of $49,000 or 100% of the
participant’s compensation for a limitation year. This change does not include a cost of living increase provision.
• Effective for plan years starting on or after January 1, 2012, the compensation limit for Puerto Rico residents
that can be considered for purposes of determining elective deferrals and employer contributions is limited
to mirror the U.S. Code 401(a)(17) limit for the applicable plan year. For example, the limit on which match
contributions can be determined for the 2013 plan year is $255,000. Previously, there was no limit.
• Safe Harbor is not permitted
• Corrections for failed ADP testing can be distributed without penalty to the plan sponsor if the distribution
occurs on or before the plan sponsor’s due date (including any extensions that have been granted) for
filing the company’s income tax return. The penalty is 10% of excess contributions.
• Catch-up permitted at lower levels – as set forth in Act 92 of May 2006, catch-up contributions were added
to the PRIRC. The catch-up contribution limit for employees age 50 and older for the 2013 plan year is $1,500.
• Voluntary after-tax employee contributions, i.e., unmatched after-tax contributions or after-tax contributions
required as a condition of employment or required in order to receive employer-funded contributions or
benefits, must be limited to 10% of the employees aggregate compensation earned from the point when the
employee started participating in the plan. This does not mean that an employee’s after-tax contributions
are limited to 10% on an annual basis. For example, it would be possible to contribute more than 10% in
after-tax contributions in one plan year if during the prior plan year(s), the participant made no after-tax
contributions. In this example, Mercer would not be able to determine an after-tax excess. However, the plan
does have the option to limit after-tax contributions to 10% of compensation per year.
Note: Some employers maintain separate plans for their PR employees while some maintain one plan that
covers both U.S. and PR employees (dual qualified plan). Please contact your Client Service Representative
if either situation applies. Our Reporting and Testing Specialists are available to discuss the impact of having
PR employees.
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Compliance Testing Manual
F O R M S A N D S A M P L E T EST
A. SAMPLE ADP/ACP TEST
This sample test provides guidelines in interpreting your test results. It provides insight into the use of information
in the test, as well as explanations of the test results and corrections, if necessary.
View the Sample ADP/ACP Test.
B. COMPLIANCE TESTING SERVICES WAIVER
This form allows you to waive testing services with Mercer on an annual or ongoing basis. If you wish to
waive any or all testing services with Mercer, please complete this form and return it to your Client Service
Representative.
Access the Compliance Testing Services Waiver.
C. TAX WITHHOLDING WAIVER
This form allows participants to waive federal income tax withholding on corrective distributions from
the plan.
View the Tax Withholding Waiver.
D. HCE LIST
This form allows you to provide us with information to determine your Highly Compensated Employees for
the following plan year. You were provided with a listing of Highly Compensated Employees and ownership
information along with your testing results. Please confirm that this information is still correct, or provide
updates to your Client Service Representative.
View the HCE List.
35
Compliance Testing Manual
ADP and ACP Non-Discrimination Testing
Results & Reports
for
DEMO
401(K) RETIREMENT SAVINGS PLAN
As of December 31, 2013
Participants who meet Statutory Minimum
Prepared by
Mercer
36
Compliance Testing Manual
For plans where Mercer determines
eligibility, participants who have met
the plan’s eligibility requirements
but not the regulatory statutory
requirements are included in this
section. These are referred to as the
“Otherwise Excludable” group. For
information on how these employees
are identified, please see the section
entitled Excludable Employees.
DEMO
401(K) RETIREMENT SAVINGS PLAN
Summary of the results
37
Compliance Testing Manual
Actual Deferral Percentage (ADP) and
Actual Contribution Percentage (ACP) Test Results
As of December 31, 2013
DEMO
401(K) RETIREMENT SAVINGS PLAN
This is the testing method
(current year or prior year,
as specified in your plan
document) that was used
to perform the ADP and
ACP tests.
Standard Method
Non-HCE Percentages Used: ADP - Current; ACP - Current
A. Step One
These tests compare the Average Highly Compensated Employees' (HCEs) % to the Average Non-Highly
Compensated Employees' (NHCEs) %. Under IRC Sections 401(k) and 401(m), the Average HCE % is limited
to the greater of the Basic Test and the Alternative test.
1.
2.
Basic Test - 125% of the Average NHCE%
Alternative Test - the lesser of
a.
The Average NHCE% plus 2%
b.
The Average NHCE% times 2
Test Results
Count
6
19
25
HCE
NHCE
Plan Total
ADP Test
Total %
52.76%
88.01%
1. Basic Test
2. Alternative Test
3. Greater of "1" and "2"
Results
Reduce HCE Avg % to
Avg %
8.79%
4.63%
Post-ATM ACP Test*
Count
Total %
Avg %
6
17.88%
2.98%
19
30.85%
1.62%
25
5.79%
6.63%
6.63%
Fails
2.03%
3.24%
3.24%
Passes
6.63%
N/A
* These ACP Test results are based on the ACP contributions remaining in HCE accounts after the forfeiture of
Attributable-To Matching (ATM) Contributions (i.e., matching contributions related to deferral contributions that
will be distributed to correct a failed ADP Test).
The HCE average must
be reduced to this level in
order for the test to pass.
See Part I - Calculated
Adjustments in the Details
of Test Corrections.
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Compliance Testing Manual
4
Summary of Catchup Contributions
As of December 31, 2013
DEMO
401(K) RETIREMENT SAVINGS PLAN
If a plan participant has reached the age of 50, (s)he is eligible to defer money in excess of the limits of the plan. These monies are
referred to as "Catchup Contributions". Such limits include, but are not limited to, the 402(g) maximum deferral limit and a
plan-imposed maximum deferral limit. Also eligible for reclassification as "Catchup Contributions" are corrective distributions to
HCEs due to failure of the ADP test.
SSN
xxx-xx-0001
xxx-xx-0002
xxx-xx-0003
xxx-xx-0007
Totals:
Name
HCE#1
HCE#2
HCE#3
NHCE#1
Initial
ADP
Contrib
23,000.00
21,500.00
17,500.00
23,000.00
402(g)/
Max Def
Catchup
Contrib
5,500.00
4,000.00
0.00
5,500.00
Net
Contrib
for ADP
17,500.00
17,500.00
17,500.00
17,500.00
ADP
Maximum
Catchup
Contrib
0.00
1,500.00
5,051.90
N/A
Total
Catchup
Contrib
5,500.00
5,500.00
5,051.90
5,500.00
4
85,000.00
15,000.00
70,000.00
6,551.90
21,551.90
This represents the
contributions that
exceeded the annual
402(g) limit or the
maximum deferral
percentage allowed
under the plan
document.
5
39
Compliance Testing Manual
This represents excess contributions
that have been recharacterized as
catch-up contributions rather than
being refunded to HCEs. This total
matches the total in the Catch-up
Contrib column in Part II Actual
Adjustments in the Details of Test
Corrections.
DEMO
401(K) RETIREMENT SAVINGS PLAN
HCE and NHCE Listings
40
Compliance Testing Manual
Name
HCE#1
HCE#2
HCE#3
HCE#4
HCE#5
HCE#6
41
Compliance Testing Manual
80,859.00
100.00% deferring
991,000.00
6
8.79
6
52.76
ADP
ADP test
Compensation Contrib.
Pct
255,000.00
17,500.00
6.86
255,000.00
17,500.00
6.86
175,000.00
17,500.00
10.00
130,000.00
9,507.00
7.31
98,000.00
9,345.00
9.54
78,000.00
9,507.00
12.19
Average HCE ADP and ACP % is derived by dividing
the HCE % total by the total number of aggregated HCEs:
Total number of HCEs:
HCE Totals:
SSN
xxx-xx-0001
xxx-xx-0002
xxx-xx-0003
xxx-xx-0004
xxx-xx-0005
xxx-xx-0006
29,430.00
2.98
6
17.88
ACP test
Contrib.
Pct
7,500.00
2.94
7,500.00
2.94
5,250.00
3.00
3,900.00
3.00
2,940.00
3.00
2,340.00
3.00
0.00
ATM
0.00
0.00
0.00
0.00
0.00
0.00
29,430.00
2.98
6
17.88
Post-ATM ACP test
Contrib.
Pct
7,500.00
2.94
7,500.00
2.94
5,250.00
3.00
3,900.00
3.00
2,940.00
3.00
2,340.00
3.00
These are the current year ADP and ACP percentages for the HCE group
Regardless of whether the plan uses current year or prior year testing method,
current year percentages are always used for the HCE group and will show in
the test results page above.
991,000.00
ACP
Compensation
255,000.00
255,000.00
175,000.00
130,000.00
98,000.00
78,000.00
If the plan fails the ADP test and corrective distributions are made to HCEs, any matching contributions that are attributable to the
distributed deferral contributions ("Attributable-To Match" or "ATM") must be forfeited, even if they are vested.
DEMO
401(K) RETIREMENT SAVINGS PLAN
Listing of Highly Compensated Employees
As of December 31, 2013
SSN
NHCE#1
NHCE#2
NHCE#3
NHCE#4
NHCE#5
NHCE#6
NHCE#7
NHCE#8
NHCE#9
NHCE#10
NHCE#11
NHCE#12
NHCE#13
NHCE#14
NHCE#16
NHCE#17
NHCE#15
NHCE#19
NHCE#22
Name
42
Compliance Testing Manual
Grand Totals:
Average NHCE ADP and ACP % is derived by dividing
the NHCE % total by the total number of aggregated NHCEs:
Total number of NHCEs:
NHCE Totals:
xxx-xx-0007
xxx-xx-0008
xxx-xx-0009
xxx-xx-0010
xxx-xx-0011
xxx-xx-0012
xxx-xx-0013
xxx-xx-0014
xxx-xx-0015
xxx-xx-0016
xxx-xx-0017
xxx-xx-0018
xxx-xx-0019
xxx-xx-0020
xxx-xx-0022
xxx-xx-0023
xxx-xx-0021
xxx-xx-0025
xxx-xx-0028
45,100.00
17,500.00
0.00
4,000.00
3,000.00
6,000.00
4,000.00
2,000.00
1,000.00
0.00
2,000.00
0.00
2,100.00
500.00
0.00
0.00
2,000.00
1,000.00
0.00
0.00
1,744,500.00
1,744,500.00
753,500.00
112,000.00
100,000.00
65,000.00
59,000.00
53,200.00
49,900.00
48,700.00
43,000.00
38,700.00
32,000.00
29,500.00
24,600.00
22,800.00
19,750.00
18,000.00
17,000.00
15,000.00
5,000.00
350.00
ACP
Compensation
43,741.00
14,311.00
3,360.00
0.00
1,950.00
1,500.00
1,596.00
1,497.00
1,000.00
500.00
0.00
960.00
0.00
738.00
250.00
0.00
0.00
510.00
450.00
0.00
0.00
1.62
19
30.85
3.00
0.00
3.00
2.54
3.00
3.00
2.05
1.16
0.00
3.00
0.00
3.00
1.10
0.00
0.00
3.00
3.00
0.00
0.00
ACP test
Contrib.
Pct
These are the current year ADP and ACP averages for the NHCEs. Please note
7
that, if the test was run using the prior year testing method, these are not the
averages that show on the test results page above.
125,959.00
4.63
19
88.01
15.63
0.00
6.15
5.08
11.28
8.02
4.11
2.33
0.00
6.25
0.00
8.54
2.19
0.00
0.00
11.76
6.67
0.00
0.00
ADP test
Contrib.
Pct
63.16% deferring
753,500.00
112,000.00
100,000.00
65,000.00
59,000.00
53,200.00
49,900.00
48,700.00
43,000.00
38,700.00
32,000.00
29,500.00
24,600.00
22,800.00
19,750.00
18,000.00
17,000.00
15,000.00
5,000.00
350.00
ADP
Compensation
DEMO
401(K) RETIREMENT SAVINGS PLAN
Listing of Non-Highly Compensated Employees
As of December 31, 2013
DEMO
401(K) RETIREMENT SAVINGS PLAN
Details of Test Corrections
43
Compliance Testing Manual
44
The calculation of excess contributions
is a two-step process. This page
reflects only the first step in the
process. In the first step, the average
deferral/contribution percentages of
the HCEs must be lowered (starting
with the HCE with the highest %, and
working down until the average results
in a passing percentage). This provides
the TOTAL amount to be distributed
from the plan, but does NOT provide
each HCE’s individual refund. The
individual returns are allocated in
Part II - Actual Adjustments below.
Compliance Testing Manual
Average Total:
6
HCE#6
HCE#3
HCE#5
HCE#4
HCE#1
HCE#2
xxx-xx-0006
xxx-xx-0003
xxx-xx-0005
xxx-xx-0004
xxx-xx-0001
xxx-xx-0002
Totals/Count:
Name
SSN
Part I - Calculated Adjustments
8.79
52.76
12.19
10.00
9.54
7.31
6.86
6.86
ADP
Pct
15,155.70
4,335.60
5,897.50
2,847.60
888.00
593.50
593.50
This is the total dollar
amount that needs to
be removed from HCE
deferrals.
80,859.00
9,507.00
17,500.00
9,345.00
9,507.00
17,500.00
17,500.00
Contributions
Adjusted
Reduction
ADP Test
6.63
39.78
6.63
6.63
6.63
6.63
6.63
6.63
Reduced
ADP Pct
This column illustrates the percentage
reduction for each HCE that is taken into
account in the determination of the total
correction amount (see “Reduction”
column for total correction amount). The
individual returns are allocated in Part II Actual Adjustments below.
DEMO
401(K) RETIREMENT SAVINGS PLAN
Corrective Distribution Report
As of December 31, 2013
HCE#1
HCE#2
HCE#3
3
xxx-xx-0001
xxx-xx-0002
xxx-xx-0003
Totals:
DEFERRAL
DEFERRAL
DEFERRAL
Sources
52,500.00
17,500.00
17,500.00
17,500.00
Adjusted
Contribs
45
Compliance Testing Manual
Under Part 1 – Calculated Adjustments, the total refund amount
was determined. This second step applies the allocation of the total
amount to individual HCEs. Refunds are allocated based on the HCEs
who have the highest contribution dollar amount. The leveling
method is used to finalize each HCE’s refund amount. In this
example, the total refund amount determined in Part 1 was small
enough to be totally allocated to the three HCEs who deferred the
most dollars. Since they each deferred the same dollar amount, the
total refund amount was allocated evenly. However, if HCE #2 had
deferred less than HCE #1 and HCE #3 had deferred less than HCE
#2, HCE #1’s deferral dollar amount would have been reduced by
either the total refund amount or until the amount it would have
taken to reach that of HCE #2. At that point, the total refund
amount had not yet been allocated, both HCE #1’s adjusted deferral
and HCE #2’s original deferrals would have been reduced evenly by
the remaining dollars to be allocated or until their deferral amounts
reached the deferral amount of HCE #3. The process would have
continued until the total refund amount determined in part one was
allocated. Note that an HCE could be included in the calculation in
Part 1. – Calculated Adjustments, but not actually receive a refund.
Name
SSN
Part II - Actual Adjustments (Corrective Distribution Amounts)
6,551.90
0.00
1,500.00
5,051.90
Catchup
Contrib
8,603.80
5,051.90
3,551.90
0.00
Excess
9
This column represents the
amounts to be recharacterized as
catch-up contributions. This amount
is also referenced in the ADP
Maximum Catch-up Contrib column
on the Summary of Catch-up
Contributions report.
0.00
0.00
0.00
0.00
402(g)
Excess
ADP Test
DEMO
401(K) RETIREMENT SAVINGS PLAN
Corrective Distribution Report
As of December 31, 2013
0.00
0.00
0.00
0.00
Earnings
0.00
ATM
0.00
Earnings
This is the total amount that must be
distributed from the plan. In this example,
the total correction amount calculated in
Part I was $15,155.70, but $6,551.90 will be
recharacterized as catch-up. Therefore, only
$8,603.80 must be refunded to HCEs.
8,603.80
5,051.90
3,551.90
0.00
ADP
Distrib
0.00
Forfeited
Amount
HCE#1
HCE#2
xxx-xx-0001
xxx-xx-0002
Corrective Distribution Report
As of December 31, 2013
ADP
Excess
8,603.80
0.00
0.00
0.00
Earnings
Sources
0.00
ACP
Vest % Excess
ADP/ACP Tests
0.00
Earnings
DEMO
401(K) RETIREMENT SAVINGS PLAN
DEFERRAL 5,051.90
DEFERRAL 3,551.90
Sources
This column represents the
amount of deferrals that
need to be returned to
HCEs. It matches the ADP
Distrib column in Part II –
Actual Adjustments. Note:
this amount does not
include earnings.
8,603.80
5,051.90
3,551.90
Total
Distrib
0.00
ACP
0.00
ATM
0.00
Earnings
This column represents any matching contributions
that were made on excess contributions. In this
plan the match formula is 50% up to 6% of
compensation. No ATM was calculated because
none of the adjusted deferral percentages for the
HCEs who received excess dropped below 6%. If
this plan matched on a greater percentage of
compensation and ATM had been calculated, any
amounts in this column would have to be forfeited
regardless of the HCE’s vesting percentage.
46
Compliance Testing Manual
0.00
0.00
0.00
Total
Forfeit
When this report was generated, participants' vesting percentages were not available and earnings allocable to distributable and forfeitable amounts could not be calculated. Allocable earnings on
all amounts will be calculated when the corrective distributions are processed. To the extent vested, the amounts currently shown in the ACP column should be distributed. The amounts shown in
the ATM column (match contributions that are related to the distributed employee contributions) are forfeited to correct the disproportionate rate of match left in the plan.
Totals/Count: 2
Name
SSN
Part III - Correction Summary
This is a summary of all
test corrections needed
for the plan. However,
it does not include
amounts needed to
be recharacterized to
catch-up.
ADP and ACP Non-Discrimination Testing
Results & Reports
for
DEMO
401(K) RETIREMENT SAVINGS PLAN
As of December 31, 2013
Participants who do not meet Statutory Minimum
Prepared by
Mercer
47
Compliance Testing Manual
For plans where Mercer determines
eligibility, participants who have met
the plan’s eligibility requirements
but not the regulatory statutory
requirements are included in this
section. These are referred to as the
“Otherwise Excludable” group. For
information on how these employees
are identified, please see the section
entitled Excludable Employees.
DEMO
401(K) RETIREMENT SAVINGS PLAN
Summary of the results
48
Compliance Testing Manual
Actual Deferral Percentage (ADP) and
Actual Contribution Percentage (ACP) Test Results
As of December 31, 2013
DEMO
401(K) RETIREMENT SAVINGS PLAN
Standard Method
Non-HCE Percentages Used: ADP - Current; ACP - Current
A. Step One
These tests compare the Average Highly Compensated Employees' (HCEs) % to the Average Non-Highly
Compensated Employees' (NHCEs) %. Under IRC Sections 401(k) and 401(m), the Average HCE % is limited
to the greater of the Basic Test and the Alternative test.
1.
2.
Basic Test - 125% of the Average NHCE%
Alternative Test - the lesser of
a.
The Average NHCE% plus 2%
b.
The Average NHCE% times 2
Test Results
HCE
NHCE
Plan Total
Count
0
1
1
1. Basic Test
2. Alternative Test
3. Greater of "1" and "2"
Results
ADP Test
Total %
0.00%
0.00%
Avg %
0.00%
0.00%
Passes +
+ This test passes because there are only non-HCEs participating.
11
49
Compliance Testing Manual
Count
0
1
1
ACP Test
Total %
0.00%
0.00%
Avg %
0.00%
0.00%
Passes +
DEMO
401(K) RETIREMENT SAVINGS PLAN
NHCE Listing
50
Compliance Testing Manual
NHCE#21
Name
51
Compliance Testing Manual
Average NHCE ADP and ACP % is derived by dividing
the NHCE % total by the total number of aggregated NHCEs:
Total number of NHCEs:
NHCE Totals:
xxx-xx-0027
SSN
0.00
0.00
0.00
1
0.00
0.00
ADP test
Contrib.
Pct
0.00% deferring
10,000.00
10,000.00
ADP
Compensation
DEMO
401(K) RETIREMENT SAVINGS PLAN
Listing of Non-Highly Compensated Employees
As of December 31, 2013
10,000.00
10,000.00
ACP
Compensation
0.00
0.00
0.00
1
0.00
0.00
ACP test
Contrib.
Pct
COMPLIANCE TESTING SERVICES WAIVER
And Amendment to Service Agreement
COMPLETE THIS FORM IF YOU ARE WAIVING TESTING SERVICES
[Plan Name]
[Plan Sponsor Name]
[Plan Number]
The Employer hereby waives certain testing services and directs Mercer HR Services, LLC not to
perform the following testing services:
❑ A
nnual and Interim 401(k) Actual Deferral Percentage (ADP) Test and/or 401(m) Actual Contribution
Percentage (ACP) Test
❑ A
nnual 415 Annual Additions Test
❑ A
nnual 410(b) Minimum Coverage Test
❑ A
nnual Top Heavy Test
This election applies to the following plan year(s):
❑ A
ll Future Plan Years
❑ C
urrent Plan Year Only: _______________________
❑ O
ther: _____________________________________________________________
The Employer represents that it has or will timely make its own arrangements for the performance of the
foregoing tests. The Employer further represents that it will promptly notify Mercer HR Services, LLC in the
event that any of the foregoing tests do not pass.
This Waiver shall constitute a written amendment to the Service Agreement.
EMPLOYER:
Signature
Print Name:
Date:
Title
52
Compliance Testing Manual
Compliance Testing
1/1/2013 – 12/31/2013
Plan Name: Demo 401(k) Retirement Savings Plan Plan Number: 123456
TAX WITHHOLDING WAIVER
I understand that I will receive a check from the above retirement plan representing a return of contributions
exceeding certain regulatory limits, and that this payment will be treated as taxable income to me for the
current tax year.
I understand that this distribution is subject to 10% federal income tax withholding, unless I elect to waive
this requirement by signing and returning this form to my employer. I understand that I am liable for payment
of federal income tax on the taxable portion of the return of contributions, and may incur IRS penalties if my
total tax withholding and payments of estimated tax are insufficient.
I elect to have no federal income tax withheld from this distribution.
Signed: _______________________________________________________ Date: _____________________________
Social Security Number: ________________________________________
Note: If you wish to have the 10% federal income tax withholding apply, do not complete this form. Your
election may be revoked at any time and will remain in effect until revoked.
53
Compliance Testing Manual
DEMO
401(K) RETIREMENT SAVINGS PLAN
2014 Plan Year
HCE List for the 2013
2014 Plan Year. These employees were identified based
We have identified the Highly Compensated Employees for the 2013
2014 could
on their 2013
2012 plan year's compensation and ownership status. Changes in ownership status or additional owners in 2013
impact the final list. Additional information about Highly Compensated Employees is available on the Plan Sponsor Web Site.
SSN
xxx-xx-0001
xxx-xx-0002
xxx-xx-0003
xxx-xx-0007
Employee Name
HCE#1
HCE#2
HCE#3
NHCE#1
Total: 4
54
53
50
Compliance Testing Manual
Compliance Testing Manual
HCE
Compensation
255,000.00
250,000.00
255,000.00
250,000.00
175,000.00
115,000.00
112,000.00
Ownership
0.00
0.00
0.00
0.00
Notes