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Understanding Year End Compliance Testing

Compliance testing is an annual IRS requirement for all qualified retirement plans and serves as a checkpoint to ensure compliance with Internal Revenue Code and ERISA provisions. Testing results for your plan will be provided for the following (based on the Plan Design, some of these tests may not be required for your Retirement Plan):

415 Limits Testing Annual Additions Limit Test (415)

This test confirms the total amount of all contributions (employee and employer) a participant receives. Your Plan will pass this test as long as the total contribution for each participant is either $49,000 (2011) or 100% of pay, whichever is less (the amount increases to $50,000 for 2012).


To ensure that your plan doesn’t discriminate in favor of your highly compensated employees (HCEs) these two tests compare the average percentages of non-highly compensated employees (NHCEs) to the HCEs.  The average percentages of the NHCEs directly control the allowable average of the HCEs.

  • The ADP Test looks at average percentage of the employee contributions only
  • The ACP Test looks at the average percentage of the employer matching and/or employee after-tax contributions

402(g) Maximum Deferral Limit Test

This test measures the maximum amount a participant can defer (including Roth contributions) within the participant’s tax year. The limit for 2011 was $16,500 ($17,000 for 2012). If your plan allows for catch up contributions for those participants who have reached the age of 50 prior to the plan year end, those participants may defer an additional $5,500 in 2011 and 2012 (making their maximum employee deferral amount $22,000 in 2011 ($22,500 for 2012). Check out the 2012 limits here.

Top-Heavy Determination/Minimum Contributions

Your 401(k) plan is considered to be top-heavy when, as of the last day of the preceding plan year, the aggregate value (not yearly, and includes both contributions and earnings) of the plan accounts of key employees exceeds 60% of the aggregate value of the plan accounts of all employees under the plan.

Form 5500 Annual Report

Upon successfully passing the annual testing requirements, your TPA will prepare the Form 5500 Annual Report and schedules for your review and approval. If an independent audit of the plan is required, your TPA will also provide information to the auditor, who will then review the documents and issue an opinion letter.

Once approved, the Form 5500 is filed electronically with the Employee Benefits Security Administration (EBSA). Your TPA will provide a Summary Annual Report for distribution to all plan participants as well as any plan beneficiaries.

The filing deadline for Form 5500 is no later than the last day of the seventh month following the end of the plan year (generally July 31st unless that date falls on a weekend or national holiday, then the date will be extended to the next business day).  You can apply to extend the filing deadline up to two-and-a-half months by filing Form 5558 at or before the 7/31 deadline.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.