Hand emptying a piggy bank
Remind Clients To Remove Excess Salary Deferrals!
January 31, 2022 | posted in: Accountants | by Frye Retirement
And Help Them Avoid ADP/ACP Non-Discrimination Testing For 2022
Excess Salary Deferrals
The total of all salary deferrals a participant is allowed to make to various retirement plans – including 401k, 403b, and SARSEP plans – is $19,500 (plus an additional $6,500 if age 50 or older) for 2021.
Please note that individuals who made salary deferral contributions to two or more retirement plans in 2021 may be most at risk for exceeding the deferral limit. If an individual defers more than this limit for 2021, the excess deferral amount plus earnings must be distributed to participants by April 15th, 2022. Per the IRS (IRC Section 402(g)(1) and Reg. Section 1.402(g)-1(e)(2)), unless excess deferrals are timely distributed, they will be included in a participant’s taxable income for the year contributed, and taxed a second time when the deferrals are ultimately distributed from the plan. The corrective distribution must be made no later than April 15th following the close of the calendar year during which the excess deferral was made.
ADP/ACP Testing
The ADP test is an acronym for the Actual Deferral Percentage test, a specific non-discrimination test that applies to employee salary deferral or 401(k) contributions; ACP test is short for the Average Contribution Percentage test. Generally speaking, the ACP test applies to employer matching contributions. Both tests compare the average deferral/contribution rates of the Highly Compensated Employee (HCE) group of participants to the average deferral/contribution rate of the Non-highly Compensated Employee (NHCE) group of participants. The plan documents specify the testing method. If the plan fails the ADP/ACP test then plan sponsors must ensure that the refund due as a result of ADP/ACP non-discrimination testing is distributed by March 15th.
To avoid the ADP/ACP testing your clients can establish a 401k Safe Harbor plan. Typically, Safe Harbor 401(k) plans automatically pass the ADP/ACP tests.
If you need guidance on sorting out excess deferrals now, or helping your clients avoid ADP/ACP non-discrimination testing in the future by establishing a 401k Safe Harbor Plan, contact us.
