Failed Testing an Opportunity to Improve Retirement Plans

Failed nondiscrimination testing may mean a retirement plan is not designed to encourage workers to save enough.

An annual study from Judy Diamond Associates, ALM’s retirement plan intelligence provider, shows 54,493 401(k) plans failed their 2013 Internal Revenue Service (IRS) nondiscrimination tests.

These plans were required to return $820 million in 401(k) contributions to highly compensated employees, resulting in increased income taxes and lower retirement savings for the impacted participants.

“The issuance of corrective distributions … means that the plan has highly compensated employees who were unable to save as much for their retirements with pre-tax income as they would like. It may also mean that the plan is not designed to encourage workers to contribute sufficiently,” says Eric Ryles, managing director of ALM Financial Intelligence. (See “You Failed Nondiscrimination Testing. Now What?”)

Judy Diamond also notes the IRS found plans that issue corrective distributions commonly have other issues. These may include inadequate fidelity bonds, incorrect calculation of vesting schedules or failure to amend plans in a timely period to conform to current laws and regulatory changes.

Judy Diamond Associates based this research on the most recently available complete set of 401(k) plan disclosure documents released by the Department of Labor, which are available in its Retirement Plan Prospector database.