Nondiscrimination tests, sometimes described as the “rocket science” of the tax compliance world, can make an employer run afoul. And that’s exactly what happened to 57,277 of the 401(k) plans that Judy Diamond Associates reports in a study
it recently released. The study says that the plans in question failed the most recent nondiscrimination tests they conducted in compliance with IRS regulations.
Failing a nondiscrimination test is no small matter and can carry hefty consequences. The failure of these 57,000+ plans resulted in them having to collectively return $794 million in 401(k) contributions to highly compensated employees (HCEs). And that, in turn, had consequences for those employees, since the plans had to make corrective distributions — meaning the plans had to return some of the HCEs’ savings, which were then subject to income tax.
And these plans are not alone. Judy Diamond reports that in 2012, 12 percent of 401(k) plans issued corrective distributions. The good news about that, however, is that that total is approximately 2 percent lower than the 2011 tally.
But one man’s weed is another man’s flower, and Judy Diamond Associates’ managing director Eric Ryles noted that making mistakes that require corrective distributions spells opportunity for advisors.
John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net portals.