Each year, most 401(k) plans must go through IRS non-discrimination testing to make sure the plan is fair for everyone—not just business owners or highly paid employees. Important: In addition to the IRS annual contribution limits that apply to everyone, HCE contributions may also be further limited if testing shows that HCE contributions exceed the maximums allowed under the non-discrimination rules in ERISA. This means you may not always be able to contribute up to the IRS maximum. 

What the Testing Means for You

  • The IRS looks at how much highly compensated employees (HCEs) contribute compared to other employees.
  • If HCEs contribute at much higher rates than everyone else, the plan could fail the test.
  • When this happens, some contributions may be refunded to HCEs to bring the plan back into balance.

Will This Affect My Account?

  • If you are not considered a highly compensated employee (HCE), your account balance will not be reduced. In some cases, additional contributions may even be made to your account if your employer chooses that correction method.
  • If you are an HCE, and exceeded the contribution limit allowed based on plan testing, some of your contributions may be refunded. You’ll be notified if that happens. The amount of the failure will be distributed to you, adjusted for gain/loss. The corrective distributions will be taxable in the tax year in which the check was issued, does not affect your prior year tax filing and the funds will be treated as normal income.

How Do I Know if I Am a HCE or NHCE?

Any eligible employee who meets one or more of the following criteria is considered a highly compensated employee (HCE) in 2024:

  • Earned more than $150,000 in prior year 2023*
  • A more than 5% shareholder of the company in 2023 or 2024
  • Is the spouse, parent, child, or grandparent of a more than 5% shareholder of the company (referred to as an owner by attribution)

*Important note: Employees who were hired in 2024 will not receive HCE status even if their compensation exceeds $150,000 in 2024. For example, an employee hired in June 2024 earns more than $150,000 by December 31, 2024, said employee is not an HCE in 2024. However, if 2024 is the first plan year, an HCE is an individual that earned more than $150,000.00 in that plan year. 

I Received an Email About a Withdrawal I Did Not Request. How Can I Tell If It Is a Corrective Distribution?

I received an email about a withdrawal I did not request. How can I tell if it is due to this testing and refunding my contributions?

  • Log in to your employee dashboard
  • Click on 401(k) in the left-hand navigation menu
  • Select Withdrawal/Rollover Out
  • Click on the View button for the distribution that is being processed
  • Look at the type of distribution in the details. If it is due to non-discrimination testing it will say ADMINISTRATIVE -- CORRECTION_ADP_ACP_EXCESS

Need Help?

If you have questions about testing or a corrective distribution, email us at info@myubiquity.com or chat with us 24/7 by clicking the chat icon after logging into your account.

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