At the end of every plan year, 401(k) plans must pass nondiscrimination testing to maintain their status as a tax-qualified plan. Failing a test can be costly. Some plan sponsors will need to make additional contributions on behalf of lower paid employees – a contribution that may not have been anticipated in their benefits budget. In other cases, the testing failure will need to be corrected by requiring highly paid employees to take a distribution of a portion of that year’s salary deferrals. Not only do these valued employees forego the ability to save as much for retirement as they had hoped, they lose the tax deferral benefit on the amount of the corrective distributions.
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