Qualified Plan Design and Compliance
What this domain tests
Qualified plan design and compliance tests your ability to apply IRC qualification rules to real plan designs: coverage, nondiscrimination, contribution limits, vesting, top-heavy minimums, distributions, and safe harbors. The exam favors fact patterns where one failed test drives a correction.
Core rules
- Coverage: IRC 410(b) requires the plan to cover at least 70% of nonexcludable employees under the ratio percentage test, or pass the average benefit test.
- Nondiscrimination: 401(a)(4) prohibits discrimination in contributions or benefits; 401(k) plans also run ADP and ACP tests unless a safe harbor applies.
- Limits: 402(g) caps elective deferrals; 415(c) caps annual additions; 401(a)(17) caps compensation.
- Top-heavy: if key employees exceed 60% of plan benefits, a minimum contribution or benefit is required.
- Safe harbors: a 3% nonelective or basic matching safe harbor avoids ADP/ACP testing but imposes notice, vesting, and annual requirements.
Worked example
An HCE group has an ADP of 7.0%; the NHCE group has an ADP of 4.0%. The ADP limit is the lesser of 1.25 × 4.0% = 5.0% or 4.0% + 2.0% = 6.0%, so the limit is 5.0%. The plan fails by 2.0%. The employer may make corrective distributions to HCEs, or use a design-based correction such as a safe harbor or a non-discriminatory contribution. Reason: the test is failed at the HCE group level, and correction must remove the excess or satisfy an allowed correction method.
Traps
Do not apply the 2-percentage-point spread without the 1.25 multiplier when the NHCE ADP is above 2%; do not overlook the gateway in cross-tested plans; and do not assume a safe harbor plan is exempt from top-heavy or 415 limits.