Current Thinking

Avoid Plan Pitfalls During Testing Season

As we embark on yet another “testing season” for retirement plans, we are again reminded of all the ways that employers may run afoul of numerous compliance rules. Of course, compliance concerns may arise at any time, but this time of the year reinforces the importance of having someone on your side who can help keep your plan on the proper course.

What Could Go Wrong?

Congress did not design retirement plans to be complicated. But over the years, layers of rules have been added—mostly to benefit participants or to address an emerging problem. Here are some of the common testing provisions for plans.

  • Actual Deferral Percentage (ADP) & Actual Contribution Percentage (ACP) testing – these tests compare the average deferral and matching contribution rates between highly compensated employees (HCEs) and non-highly compensated employees (non-HCEs). (The ADP test does not apply to 403(b) plans.)
  • Minimum coverage testing – plans must generally benefit non-HCEs in a certain proportion compared with HCEs. While some plan designs automatically pass this test, others do not—and must be tested for each contribution type.
  • Top-heavy testing – if “key employees” (owners and the most highly paid employees) accumulate more than 60 percent of plan assets, the plan is considered “top heavy,” and additional contributions to non-key employees must be made. The plan’s vesting schedule may also have to be accelerated.

In addition, employers must monitor various contributions to make sure that they do not exceed applicable limits.

  • Deferral limit – for 2023, the deferral limit for individuals under age 50 is $22,500; those who reached age 50 or older in 2023 may defer an additional $7,500.
  • Deduction limit – the deductible employer contribution cannot exceed 25 percent of total eligible participant compensation.
  • Annual additions limit – for 2023, the total combined limit for employee and employer contributions is $66,000 (or $73,500 for those eligible for catch-up contributions).

These are just some of the compliance rules that employers must follow. Add to this the many other ways that employers can get tripped up.

  • Distributions and loan processing.
  • Determining eligibility, including long-term, part-time (LTPT) employees.
  • Computing eligible compensation (depending on the elected plan definition and on various exclusions.)
  • Calculating breaks in service for eligibility and vesting upon rehire.
  • Processing deferral elections (starting, stopping, and revising).

What Are the Options?

Employers have options for administering their plans. Some try to navigate retirement plan rules themselves, thinking “Hey, we’re pretty smart. After all, we’ve started a successful business. How hard can it be to add a retirement plan to the mix?” Unfortunately, we have witnessed too many talented business owners underestimate the effort and expertise that is needed to run a compliant retirement plan.

Often, employers hire experts to help them with their plans. Payroll providers may provide some of these services, and plan recordkeepers are often used, as well. But understandably, most recordkeepers are careful to perform mostly “ministerial” tasks to avoid any fiduciary liability for their actions. That is, they will not exercise any discretion in carrying out their duties. They will simply act on the information that the employer supplies them.

What’s the Solution?

Considering the complexity of current retirement plan rules, it’s not surprising that many employers get tripped up at times. The list of possible errors is nearly limitless. And as new plan provisions are added by Congress or through the regulatory process, there are even more rules that employers must follow.

Employers are ultimately responsible for monitoring more and more changes to the retirement plan rules. Even for those service providers who deal with these rules every day, the sheer amount of information can be daunting. But for employers—who simply want to run their businesses without unnecessary burdens—effectively administering their plans can be overwhelming.

3(16) Fiduciary Outsourcing—the Peace of Mind of a Professional on Board

It is difficult to be a jack, let alone a master, of all trades when it comes to running a retirement plan. Let’s face it—the larger the plan, the more complex the issues. That’s why today, a growing percentage of retirement plan sponsors outsource many of the day-to-day administrative duties to a 3(16) fiduciary services provider.

A 3(16) Plan Administrator is the fiduciary who manages the day-to-day administration of a retirement plan, not only performing traditional Third Party Administrator (TPA) services, but accepting responsibility for ensuring that they are done right, including signing and filing a retirement plan’s Form 5500—a task many plan sponsors are happy to have off their plate.

A 3(16) fiduciary can hold a valuable portion of the financial wellness of the client’s business and its employees in its hands. Fiduciary oversight can help sponsors avoid plan errors in the first place. finding plan issues before they become problems—saving clients from significant fines and penalties.


The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise.