Qualified Plan Design and Compliance
Qualified Plan Design and Compliance
This domain tests plan design choices and the nondiscrimination and limit tests that keep a qualified plan qualified. Design and compliance are linked: a design feature that looks attractive-last-day allocations, permitted disparity, a safe harbor match-must still satisfy coverage, nondiscrimination, top-heavy, and annual limit rules.
Core tests
- Coverage under IRC 410(b): the plan must cover at least 70% of nonexcludable employees under the ratio test, or satisfy the average benefit test.
- Nondiscrimination under IRC 401(a)(4): contributions or benefits must not favor highly compensated employees (HCEs).
- ADP and ACP tests for 401(k) deferrals and matching contributions, unless a safe harbor design applies.
- Annual limits: 402(g) elective deferrals, 415(c) annual additions, and the 401(a)(17) compensation cap.
- Top-heavy minimum contributions when the plan is top-heavy.
Worked example
A 401(k) plan has an ADP for NHCEs of 5%. The HCE ADP is 8%. Under the basic ADP test, the HCE ADP may not exceed the greater of 125% of the NHCE ADP (6.25%) or the lesser of 200% of the NHCE ADP (10%) or NHCE ADP plus 2 percentage points (7%). The HCE limit is 7%, so the plan must correct the excess. The administrator refunds or recharacterizes the excess deferrals for HCEs, with earnings, within the correction deadline, and issues the required tax reporting.
Traps
Using the wrong lookback year for HCE determination; testing compensation above the 401(a)(17) cap; treating all matching contributions as exempt from ACP; forgetting that safe harbor status can be lost by a late notice or an improper match; and missing the top-heavy minimum when the plan is top-heavy on the determination date. Design features must be tested as actually operated, not as described in the document.