HR Glossary

401(k) compliance

What is 401(k) compliance?

401(k) compliance refers to the process of ensuring that an organization's 401(k) retirement plans follow the rules and regulations set by the Internal Revenue Service (IRS) and Department of Labor (DOL).

What is the purpose of a 401(k) compliance plan?

A 401(k) compliance plan ensures that an organization's retirement program is fair, beneficial, and aligned with IRS and DOL regulations. It helps guarantee that employees of all levels have equal access to retirement benefits while also protecting the organization from penalties, lawsuits, and the loss of special tax advantages.

Both employees and employers benefit from this compliance. Employees can save money before taxes, reducing their taxable income and helping grow their savings faster. Employers' matching contributions are tax-deductible, which reduces their overall business taxes.

What are the key requirements associated with 401(k) compliance?

Organizations must adhere to the following as part of 401(k) compliance:

• Non-discrimination testing: Annual ADP and ACP tests ensure all employees benefit proportionally.
• Timely deposits: Organizations must deposit employee contributions within a few days after processing payroll.
• Form 5500: This must be filed annually, as it reports the 401(k) retirement plan's financials and compliance with the IRS and the DOL.
• Participant notice: Employers are required to offer notices like plan summaries, safe harbor notices, and more to the participants.
• Plan document: The plan must operate in a way that aligns with the plan document.
• Employee eligibility: Organizations are expected to apply the eligibility rules very carefully so that no qualified employees are left out.
• Audit: The plans in which 100 or more participants are enrolled should undergo audits annually.
• Contribution limits: The contributions to retirement made both by the employee and the employer should stay consistent with the IRS rules.

Who is considered a highly compensated employee under 401(k) compliance?

Highly compensated employees (HCEs) are those who hold more than 5% of the company shares or who earn above the varying salary limit set by the IRS every year. For the year 2025, this threshold is $160,000.

What are the non-discrimination tests required for 401(k) compliance?

Organizations need to partake in the following tests for 401(k) compliance:

• Actual Deferral Percentage (ADP) tests determine if HCEs contribute a higher percentage of their salary into their 401(k) retirement plans than non-highly compensated employees (NHCEs).
• Actual Contribution Percentage (ACP) tests show if the employer matching and after-tax contributions benefit HCEs more than NHCEs.
• Top-heavy tests are used to check if more than 60% of the contribution to the retirement plan is made by the employers or key employees. In such a case, employers should make contributions for non-key employees.

What are some of the documents that employers should maintain as part of 401(k) compliance?

The following key documents are associated with 401(k) compliance:

• Plan document and amendments

These documents explain how the plan operates, its provisions, and other rules.

• Summary Plan Description (SPD)

This is a simple document that explains the plan’s provisions in simple language, meant to be used for employees.

• Form 5500

This document is filed annually with the IRS and DOL to report plan details, such as its financial conditions and operations.

• Nondiscrimination testing reports

These are reports from the non-discrimination tests, meant to determine if all employees are treated fairly.

• Contribution and payroll records

These details provide essential information on employee deferrals, employer matching, and deposits.

• Participant notices and disclosures

These are copies of the documents used to provide information on annual fee disclosures, fee change notices, and more to employees.

• Plan audit reports

These are independent audit reports used to determine the plan’s financial accuracy.

• Employee eligibility and enrollment forms

These are records that highlight which employees are eligible and when they were enrolled.