401(k) Compliance Testing

Explore frequently asked questions by 401(k) employers

Basics

What is compliance testing?

401(k) plans offer tax benefits to both employees and employers. To ensure the plan is being offered and utilized in a non-discriminatory manner, compliance testing is required annually. Completion of the Compliance Hub is the first step towards completing your plan’s annual compliance testing. Complete the questionnaires and company census by January 31, 2023 to meet the federally-mandated deadlines for your 401(k) plan. To learn more about compliance testing, visit this resource. If your plan ...

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Our plan was created this year. Why do you need last year’s census information?

We need last year’s census information because Highly Compensated Employees (HCEs) are calculated on a lookback year. In other words, in order to prepare your compliance testing for the year in question, we need to calculate who the HCEs are based on the prior year’s compensation. This is not an optional request.

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Why do you need this information? Can you use what we provided last year?

The information we request during compliance testing is used to prepare an annual Form 5500 on your company’s behalf.  Similar to other tax forms, the information detailed on this form must accurately reflect the plan’s state over the course of the plan year. Things do change. For example, HCEs and owners may vary from one year to the next. For this reason, we ask that you provide this information annually.

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How can we avoid HCE refunds next year?

If your company would like to avoid refunds for Highly Compensated Employees (HCEs), there are several potential resolutions to consider: Add automatic enrollment / escalation to your plan if not already applicable; Encourage your employees to contribute more by adding a matching contribution or through general education; and Some plan designs can avoid certain testing altogether, called safe harbor plans, but they require that certain employer contributions be made (~3-4%) and an accelerated ...

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When can we expect Compliance testing results?

The availability of your testing results will vary depending on your plan type. For Traditional plans, you can expect to receive your company’s 2022 testing results and 2022 employer contribution calculations no later than March 10th, 2023.  Safe Harbor plans do not require Compliance testing. You can expect to receive your company’s 2022 employer contribution calculations allocation no later than May 31st, 2023.  If your plan offers or requires an employer contribution and you would like to ...

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What should we do with our Compliance package?

Your compliance package is provided for audit purposes and should be saved to your company’s records. The package does not need to be distributed to employees. Participants should only be notified if the plan fails testing, and there is an impact on their personal accounts. We will let you know if that is the case.

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Why does the Betterment pre-filled census not match with our census records?

Mismatched census records typically indicate that your plan converted to Betterment mid-year. If you converted mid-year, please be sure to upload the full year’s worth of census information. If you did not convert plans mid-year, the mismatch could be the result of Betterment receiving incomplete payroll records or inconsistent payroll records from earlier in the year, where the records we received did not match the actual payroll information. It certainly happens, but what matters most is that ...

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Why won’t the census file upload?

CSV files can have tricky formatting requirements. We have listed out some troubleshooting tips below:  Do not change any headers in the file, and keep numbers in simple form Do not include dollar signs, commas, percentage symbols, or any other special symbol Keep any cells blank that should show a 0 value

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Where can I find my Fidelity Bond information?

During the onboarding of your plan, you may have acquired a Fidelity Bond through an insurance provider. Alternatively, you may have had an existing Fidelity Bond if you transferred from a different provider to Betterment at Work. Betterment does not offer Fidelity Bonds, nor do we manage them on your behalf. For more information or assistance with your Fidelity Bond, you will need to contact your provider directly. 

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Contributions & distributions

What if a new employee made contributions to their prior 401(k) plan?

It is the employee’s responsibility to monitor their collective 401(k) contributions to ensure they do not exceed the annual limit. While there may be penalties for the employee if they over-contribute, there is no impact to the plan.

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What is a discretionary match and its value?

Offering a match is one way to reward your employees for participating in the 401(k) plan. Unlike a safe harbor matching contribution, a discretionary match is a matching contribution that is not required and does not provide any non-discrimination testing relief. There are many reasons to offer a match. For more on the importance and benefits of offering an employer match, visit this resource. 

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Do we need to report discretionary contributions?

As part of the “Discretionary employer contribution questionnaire,” we request information about discretionary contributions. If you sponsor a safe harbor plan, you are not required to enter your existing formula here. Safe harbor formulas are written into the plan document, which we already have on file. However, if you utilize a safe harbor formula and would like to make additional discretionary contributions on top of that formula, you will need to provide those details. If you are not sure ...

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What is a profit sharing contribution?

Unlike a match, profit sharing contributions go to all eligible employees and not just those who participate in the plan.  There are three types of profit sharing contributions. Section D.22 of your plan document will explain which of the following options your plan allows. Pro-rata: By far the most common, a pro-rata contribution allocates money as an even percentage of compensation amongst all employees. Integrated: Integrated contributions are similar to pro-rata except for that amounts over ...

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When are employer contributions due?

To qualify as a deduction, employers must deposit employer contributions into the plan no later than the business’s federal income tax filing deadline for that year. If the business has a filing extension, the contribution may be made up until the extended deadline.  Please note, if your plan offers or requires an employer contribution and you would like to apply your employer contribution by a specific tax deadline, you will need to let us know at least 45 days in advance of that deadline to ...

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Understanding plan documents

What is a controlled group?

A controlled group is formed when a business has a specific amount of shared ownership. When enough ownership is shared, the owners’ respective 401(k) plans must be combined for non-discrimination testing purposes. For this reason, we request information on ownership annually. 

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What is a Form 5500?

Form 5500 is a required governmental filing for all 401(k) plans. The form discloses details about the financial condition, investments, and operations of the plan. Betterment will prepare your Form 5500 after compliance testing is completed and will contact you if additional information is needed. To learn more about Form 5500, visit this resource.

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What is a NAICS code?

NAICS is short for North American Industry Classification System. This code is required to execute Compliance testing, so we ask that you provide it to us annually. If you need help finding your code, visit this resource.

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Who is considered an owner?

Ownership and officer information is an important part of identifying Highly Compensated Employees (HCEs). An owner is anyone who owned or owns at least 1% of the company in the plan year for which you are completing the Compliance Hub, or for the prior plan year. You will also need to provide information on who is related to owners as ownership may be attributed to specific family members, namely spouses, parents, children, and grandchildren. We will determine if ownership is attributed with ...

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Who is considered an officer?

Officers are generally defined as administrative executives who are authorized to make key organizational decisions. Typically executives such as the president, vice president, general manager, and secretary are considered officers. We recommend confirming officers with your legal counsel if you are not sure who to list, as we are not able to provide you with legal or financial advice.

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How do plan compensation and total compensation vary?

Total (gross) compensation is not always the same as plan compensation. Plan compensation is defined in your plan document and may exclude certain compensation such as bonuses, commissions, taxable fringe benefits, and pre-entry compensation. Certain types of excluded compensation may require additional compliance testing, so it is important that we receive both figures. Please review section A.15 of your Adoption Agreement to determine if your plan compensation is different from your total ...

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