Compliance Testing User Guide - Empower Retirement

Compliance Testing User Guide

Table of Contents

I. General Testing Information

II. Completing and Uploading Census Information

a. Census Submission Checklist

b. How to Obtain the Compliance Data Summary Report

c. How to Obtain a Census File

d. Sample Census

e. Explanation of Census Data

f. Compensation Q & A

g. Helpful Hints for Census File Setup

h. Excel Tips

i. Census Troubleshooting

j. Census Upload Q & A

III. Census Upload Errors and Warnings

IV. Entering Ownership Information

V. Completing the Year-End Questionnaire

VI. Explanation of ADP/ACP Leveling Method for Corrections

VII. On-Demand Compliance Testing

VIII. Complete User Guide

General Testing Information

IRC ¡ì401(k)(3)¡ªActual Deferral Percentage Test (ADP) and/or

IRC ¡ì401(m)(2)¡ªActual Contribution Percentage Test (ACP)

To pass either the ADP or ACP test one of two tests must be met:

? Basic Test: the average deferral/contribution percentage of the highly compensated employee (HCE) group must

not exceed 125% of the average deferral/contribution percentage of the non-highly compensated employee

(NHCE) group

? Alternative Test: the average deferral/contribution percentage of the HCE group must not exceed the average

deferral/contribution percentage of the NHCE group by the lesser of 2 plus or 2 times the ADP or ACP of the

NHCEs

IRS regulations allow the use of either prior year or current year testing methods, which is outlined in the plan document.

Under both the prior and current year testing methods, the ADP or ACP for the HCEs is always determined using data

from the plan year being tested. If the current year method is used, the ADP or ACP for the NHCEs is also determined

using data from the plan year being tested. However, if the prior year test method is used, the ADP or ACP for the

NHCEs is determined using data from the preceding plan year. A number of restrictions apply in order to switch between

these methods.

IRC ¡ì401(a)(17)¡ªCompensation Limits

This provision applies an annual compensation limit to each employee who participates in a qualified plan. The

compensation limit is applied when calculating a participant¡¯s contributions for the plan year (i.e. deferrals, employer nonelective or match contributions) and in nondiscrimination testing. The dollar limit is effective January 1 and is applied in

the calendar year in which the plan year begins. For 2023 the compensation limit is $330,000.

IRC ¡ì402(g)¡ªLimitation on Elective Deferrals

For 2023, the IRS limit on participant contributions is $22,500 If there are 402(g) violations, excess deferrals and any

income accrued must be returned to the participant by April 15 following the year of excess deferral. If distributed by April

15, the excess deferral is taxable to the participant in the year the deferral was made with income attributable to the

excess deferral being taxable in the year distributed.

IRC ¡ì410(b)¡ªMinimum Coverage

In order to maintain its qualified status, a plan must benefit a minimum percentage of eligible NHCEs. Each component of

the plan (employee deferrals, employer matching contributions, and employer non-elective contributions) must pass the

coverage test.

The Ratio Percentage Test requires that a plan benefit a percentage of NHCEs equal to 70% or more of the percentage of

HCEs who benefit under the plan. The plan¡¯s coverage ratio is determined by dividing the ratio of benefiting NHCEs by

the ratio of benefiting HCEs. If the plan fails the ratio percentage test, it may still pass under a more rigorous testing

procedure called the Average Benefit Test.

Generally, employees who are not counted for purposes of this test are: employees who have not met the minimum age

and service requirements of the plan, employees who are covered by a collective bargaining agreement (union

employees), certain non-resident aliens with no U.S. source income, and if the plan provides, those who have worked less

than 500 hours and are not employed on the last day of the plan year.

IRC ¡ì414(q)¡ªHighly Compensated Employee Definition

An employee will be considered to be a highly compensated employee (HCE) if he/she meets any of the following:

? the employee owned more than 5% of the Employer at any time during the current plan year or during the 12

months preceding the plan year

? an employee who is a lineal ascendant, descendant, or spouse* (i.e. spouse*, children, parents or grandparents)

of a more than 5% owner is treated as owning the same interest and is an HCE. *Effective September 16, 2013

under the Defense of Marriage Act (DOMA), the term spouse includes same-sex couples legally married in any

state or foreign jurisdiction that recognizes such marriages regardless of state they currently reside.

? the employee had compensation in excess of $135,000* during the 12 months preceding the plan year and, if

elected by the employer, he/she was in the top 20% of employees ranked by compensation for the 12 months

preceding the plan year. *The Highly Compensated Threshold amount is indexed ¨C lookback year amounts

should be carefully reviewed as amounts may differ each plan year.

General Testing Information

Rev. 12/16/2022

IRC ¡ì414(s)¡ªCompensation Ratio Test

If a plan excludes certain forms of compensation (such as bonuses, commissions, or overtime) this test must be

performed. It requires that the average of the ratio of plan compensation to total compensation for the HCE group be not

more than a de minimis amount higher than the average of the ratio of plan compensation to total compensation for the

NHCE group. Some within IRS have unofficially indicated 3% or less as a standard, but each plan is viewed on a facts

and circumstances basis.

IRC ¡ì414(v)¡ªCatch-up Contributions

If elected in the plan document, any participant age 50 or older will be able to make annual catch-up contributions in

addition to their normal elective deferrals. The catch-up limit in effect for 2023 is $7,500.

A contribution is considered a catch-up contribution when it exceeds one of the following three limitations:

? Statutory Limit: A participant¡¯s elective deferrals may be limited by the Statutory Limits, which include the Elective

Deferral Limitation under IRC ¡ì402(g) and the Annual Additions Limit under IRC ¡ì415. Consider the XYZ

Company 401(k) Plan, which has a plan year end of December 31, 2023. Employee X defers $30,000 during

the year; therefore, $7,500 is in excess of the ¡ì402(g) limit. Since Employee X is over 50 years of age, $7,500

will be treated as a catch-up contribution, if permitted by the plan.

? Employer-Provided Limit: A plan may contain a provision that restricts the amount of elective deferrals an

employee is able to contribute. If an individual exceeds this limit and is eligible for catch-up contributions, the

amount exceeding the plan limit will be categorized as such, as long as it does not exceed the the Catch-up Limit

for the year. For example, the XYZ company 401(k) Plan imposes a 15% limit on the amount of employee

deferrals. Employee Y has compensation of $35,000 and total deferrals of $6,125 which is 17.5% of his pay for

the year. At the end of the plan year, it is determined that the individual exceeded the plan-imposed limit of 15%

by 2.5%, which equates to $875. The $875 would be considered a catch-up contribution since Employee Y is 50

years old.

? Actual Deferral Percentage (ADP) Limit: An Actual Deferral Percentage (ADP) Limit is imposed on 401(k) plans.

The Actual Deferral Ratio (ADR) for a participant is calculated without regard to the amount that may be

considered for catch-up due to the Statutory Limit and/or the Employer-Provided Limit. If a plan fails the ADP

test, the amount to be refunded to catch-up eligible participants is first offset by the amount of the Applicable

Dollar Catch-up Limit. The catch-up amount due to Actual Deferral Percentage (ADP) Limit is calculated after the

ADP test has been performed; all amounts eligible for disbursement under ¡ì401(k)(8) or 408(k)(6)(C) must be recategorized as catch-up contributions, up to the Applicable Dollar Catch-up Limit.

IRC ¡ì415¡ªMaximum Annual Additions

Under IRC ¡ì415(c), the annual additions that are credited to the participant¡¯s account for 2023 may not exceed the lesser

of $66,000 or 100% of the participant¡¯s ¡ì415 compensation. Annual additions include, but are not limited to, employer

contributions, forfeitures that are reallocated to the participants and employee contributions to all plans.

IRC ¡ì416(i)(1)(a)¡ªKey Employee Definition

Under IRC ¡ì416(i)(l)(a) a key employee is any employee who at any time during the current plan year is:

? a greater than 5% owner of the employer

? a greater than 1% owner of the employer and earning annual compensation from the employer in excess of

$150,000

? an officer of the company receiving compensation in excess of $215,000 (for 2023)

IRC ¡ì416¡ªTop Heavy Test

The plan may be considered top heavy for the next plan year if the account balances of key employees are more than

60% of the account balances of all employees as of the last day of the current plan year.

If the plan is top heavy for a given plan year, the employer must make a minimum contribution to the accounts of all nonkey employees. Generally the minimum is 3% of each non-key employee¡¯s compensation or if less, the highest rate of

contribution made by or on behalf of any key employee. Non-key employees are entitled to receive this contribution if

they are employed on the last day of the plan year regardless of the number of hours worked during the plan year.

Account values attributable to employer contributions must also be vested according to an IRS approved top-heavy

vesting schedule.

General Testing Information

Rev. 12/16/2022

IRS LIMITS

Code Section

2024

2023

2022

2021

2020

2019

2018

IRC

¡ì401(a)(17)¨C

Compensation

Limits

$345,000

$330,000

$305,000

$290,000

$285,000

$280,000

$275,000

IRC ¡ì402(g) ¨C

Limitation of

Elective

Deferrals

$23,000

$22,500

$20,500

$19,500

$19,500

$19,000

$18,500

IRC ¡ì414(q) ¨C

Highly

Compensated

Employee*

$155,000

$150,000

$135,000

$130,000

$130,000

$125,000

$120,000

IRC ¡ì414(v) ¨C

Catch Up

Contributions

$7,500

$7,500

$6,500

$6,500

$6,500

$6,000

$6,000

IRC ¡ì415

Maximum

Annual

Additions

$69,000

$66,000

$61,000

$58,000

$57,000

$56,000

$55,000

IRC

¡ì416(i)(l)(a) ¨C

Key Employee

(Officer Comp

Limit)

$220,000

$215,000

$200,000

$185,000

$185,000

$180,000

$175,000

Social Security

Taxable Wage

Base

$168,600

$160,200

$147,000

$142,800

$137,700

$132,900

$128,400

*The compensation used to determine highly compensated employees (HCE) is the compensation made in the twelve

months prior to the plan year being tested. For example, if you are testing a 1/1/2023 to 12/31/2023 plan year you would

look to see if anyone made greater than $135,000 from 1/1/2022 to 12/31/2022.

General Testing Information

Rev. 12/16/2022

Completing and Uploading Census Information

If you have a question regarding the specific census information being requested, or are questioning how a

particular column needs to be formatted, please view the Sample Census and Explanation of Census Data.

If you have not completed the census and would like to download a current census, created from the payroll files

remitted throughout the year, you may do so through the ¡°Reports¡± feature on the main tool bar.

If you have not submitted the final payroll, then please see the How to Obtain the Compliance Data Summary

Report for complete instructions on obtaining this file. If the final payroll has been submitted, then please see the

How to Obtain a Census File for complete instructions on obtaining this file.

It is important that ALL employees who received compensation during the plan year are included on the year-end

census regardless of whether they are eligible or participate in the plan.

To Upload the Census, please follow the instructions below:

?

From the ¡®Compliance Services¡¯ page on PSC, choose ¡°Pending¡± under ¡°Census¡± heading for the current

plan year end.

?

You may either click on the ¡°Browse¡± button to select the census file you have created or type in the file

path in the space provided (i.e., c:\census.txt). Once the path is entered, select ¡°Upload File¡±.

?

The web site will check the data for reasonableness.

?

If you receive a page titled ¡°Errors and/or Warnings¡±, corrections must be made to the file or assumptions

must be accepted before the census will be successfully uploaded. Refer to the Census Upload Errors

and Warnings section for additional information. The Helpful Hints for Census Setup page details what is

required and what assumptions will be made. Once the necessary corrections have been made to the

census file, click on ¡°Upload File¡± to re-submit the census.

?

Once the census file is cleared of all errors and/or warnings it is ready to be submitted to Compliance

Services for testing. You will have three options:

?

¡°Compliance Services Only¡±. This will allow you to submit data that will only be used for testing and

will not update any records on the recordkeeping system.

?

¡°For Compliance and Recordkeeping Services¡±. If this option is selected the recordkeeping system

will be updated with the census data for employees who are currently on our system. The following

information will be updated:

o

Eligibility Status ¨C if provided on the census file it will update the excluded class

code under the employees¡¯ information.

o

Date of Birth

o

Date of Hire, Date of Termination and Date of Rehire ¨C will only update on the

recordkeeping system if the date logic makes sense to what is currently stored.

o

Hours ¨C the census data will update the system only if the plan is set up to accept

year-to-date hours and vesting services are provided.

o

Pre-Entry Compensation

o

Plan Compensation

o

Total Compensation

o

Prior Year Compensation

o

Officers

It is important to know that if you do not make these changes to the payroll submissions, the

information may be overwritten with your next payroll upload.

?

¡°No, Continue Working¡±. This option will allow you to make additional corrections to the census file

before selecting one of the other two options.

Completing and Uploading the Census Information

Rev. 11/06/2020

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