Retirement Benefits: Qualification Testing, Limits, and Funding
The Retirement Benefits domain tests qualified and nonqualified plan design against the Internal Revenue Code, ERISA fiduciary standards, and the funding rules for defined benefit promises. Expect questions that combine a limit with a test: a contribution figure that must be checked against §415(c), or a deferral rate that must survive ADP testing before it can be paid.
Qualification tests
- Coverage under §410(b) compares the percentage of non-highly compensated employees benefiting with the percentage of HCEs benefiting; the ratio must reach 70%.
- §401(a)(4) prohibits discrimination in contributions or benefits. ADP and ACP tests police elective deferrals and matching contributions; safe harbor designs (3% nonelective, or a match of 100% of the first 3% plus 50% of the next 2%) avoid those tests.
- Top-heavy plans (key employees hold more than 60% of account balances) owe a 3% minimum contribution to non-key employees.
- 2025 limits: $23,500 elective deferral, $7,500 age-50 catch-up, $11,250 for ages 60–63, $70,000 annual additions, and $350,000 compensation.
Distributions and funding
- Required minimum distributions begin at age 73 for those born 1951–1959 and age 75 for those born in 1960 or later.
- Defined benefit plans are subject to minimum funding under §430; underfunded plans pay PBGC variable-rate premiums and face benefit restrictions under §436.
Worked example
A plan's NHCE group has an average deferral of 4%. The ADP limit for HCEs is the lesser of two percentage points or twice the NHCE rate, so HCEs may average 6%. An HCE deferring 8% has a 2% excess that must be refunded or recharacterized. Refunded deferrals are taxable in the year distributed, and the plan must issue a corrected Form 1099-R.
Traps that cost marks
Treating coverage and nondiscrimination as one test; forgetting that a safe harbor match alone does not satisfy the top-heavy minimum unless the plan consists solely of deferrals and safe harbor contributions; applying the age-50 catch-up to participants under 50; and ignoring that the §415(c) limit counts all annual additions, including forfeitures and nonelective contributions, not just salary deferrals.