Testing Sequence

Some of the most common qualified plan rules are identifying Highly Compensated Employees (HCE), Key Employees, performing Plan Coverage, Age 70 1/2 Minimum Distributions, and ADP/ACP testing.

The normal testing sequence is performed in accordance with your company demographics, qualified plan(s), and contribution(s). The sequence provides regulatory structure to your plan testing since the qualified plan rules are very much interrelated. For example, notice ADP/ACP testing is one of the last tests to be performed. Safe Harbor 401(k) Plans are deemed to satisfy ERISA Requirements, so an actual ADP/ACP may not be required (provided you meet the safe harbor 401(k) notice requirements).

A Plan’s Testing Sequence may be

1. Identify if Key Employee(s) determination needed (see top heavy)

2. Top Heavy Test (generally closely held businesses)

3. 401(k) Deferral Limit (Plan and/or regulatory)

4. Age 50 Catch-Up (if part of your plan document)

5. Annual Addition Limit (less of an issue these days)

6. Highly Compensated Employee (identify beginning of plan year)

7. Coverage Ratio

8. ADP/ACP Testing

9. Check for Age 70 1/2 Minimum Distributions

It is helpful to list the tests your plan performs each year – even if a third-party is actually crunching the numbers.