What is compliance testing?

Annual compliance testing helps ensure that your 401(k) plan benefits all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners.

The process involves a few steps: 

  1. We ask you, the plan sponsor, to review and complete a few questionnaires within your Plan Sponsor dashboard. We refer to this as the “compliance hub.” We’ll notify you via email when the compliance hub is ready, typically in early January. The due date to complete your plan’s information is January 31.   
  2. Once you complete the questionnaires, we’ll begin running the tests on our side. 
  3. If we uncover any imbalances in your plan, this would be considered a “compliance failure.” But don’t fret - the next step is to fix these failures. We’ll run some calculations for what would need to be done in order to bring your plan back into balance; this could include returning some contributions to highly-compensated employees and/or by making additional contributions to non-highly compensated employees. Traditional plans are more likely to have to make corrections than Safe Harbor plans. 
  4. Traditional plans will get testing results by mid-March, along with any corrective actions that are needed; you’ll need to approve these corrective actions quickly in order for us to meet the government’s March 15 deadline. Safe Harbor plans will get testing results by May 31.  

To learn more about the nuances of compliance testing, read our blog article