Compliance Testing Mandated by IRS Regulations for Defined Contribution and Defined Benefit Plans:
In order to ensure that employee benefit plans do not violate certain standards imposed by the DOL and IRS, plans are subjected to annual compliance tests.
Code Section 415 – Limit on Annual Additions
In any plan year the employer-provided benefits that participants can accrue in defined benefit plans and the amounts that can be contributed to defined contribution plans are limited. This limit is always monitored by calendar year and is the lesser of 100% of gross compensation or:
401(a) Plan Limits
The total contribution limit for 401(a) defined contribution plans under 415(c)(1)(A) is $51,000 in 2013. This includes both employer and employee contribution for all defined contribution plans combined. The total benefit dollar limit for defined benefit plans under 415(b)(1)(A) is $205,000 in 2013.
401(k) Plan Limits
- 401(k) General Limit on salary reduction contributions (402(g)(1))— $17,500
- 401(k) age 50 catch-up contribution limit (must be age 50 or over) (414(v)(2)(B)(i)) — $5,500
403(b) Plan Limits
- 403(b) General Limit on salary reduction contributions 402(g) limit — $17,500
- 403(b) Basic Limit, Section 415 limit — $51,000
- 403(b) age 50 catch-up contribution limit (must be age 50 or over) — $5,500
IRA Limits (2012 and 2013)
- Traditional and Roth IRA limits — $5,500
- IRA age 50 catch-up contribution limit (must be age 50 or over) — $1,000
Code Section 401(k) and 401(m)
Actual Deferral Percentage (ADP)/Actual Contribution Percentage (ACP) test – The annual non-discrimination tests for 401(k) plans mandated by the IRS to ensure that a plan does not unduly benefit owners and highly compensated employees at the expense of other employees. The ADP and ACP tests must be passed in order to satisfy the non-discrimination requirements of the IRS if the plan is to continue. If the plan fails either test, the employer must take corrective action to protect its qualified status in the 12-month period following the close of the plan year in which the oversight occurred.
Code Section 401(a)(4)
Requires a qualified plan (or a 403(b) plan that features employer contributions) to show that it does not discriminate in favor of highly compensated employees as to contributions or benefits. Many plans satisfy 401(a)(4) using designs that fall into safe harbors established by regulations. Using a safe harbor design eliminates the need for regular testing of the plan. Plans that do not fall within one of the safe harbor definitions must pass the general test of Code Section 401(a)(4).
Code Section 410(b)
Minimum Coverage Requirements – In any plan year, the plan must pass one of two coverage tests, either the ratio percentage test of the average benefit test.
Code Section 416
Top-Heavy minimums – If the total account values of key employees for all retirement plans of a business exceed 60% of the total account values of all participants, the plan is considered to be “top-heavy”.