When is prior-year census data needed?
If a business had a 401(k) plan in the prior year, census data from that year is required to properly identify highly compensated employees (HCEs). This includes information such as employee compensation, hire dates, and ownership details.
However, if the business did not have a 401(k) plan in the prior year or was not in business, prior-year data is not required. In these cases, the current plan year’s compensation will be used for HCE identification.
What is a Highly Compensated Employee?
An HCE is typically an employee who:
- Owned more than 5% of the company at any time during the current or preceding year, or
- Earned compensation above an IRS-defined threshold in the prior year.
If prior-year data is unavailable, HCE identification will be based on current plan year compensation instead.
How does prior-year census data impact nondiscrimination testing?
Census information is used in nondiscrimination tests like the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. These tests compare the contributions of HCEs and non-HCEs to help to ensure that the plan benefits employees fairly. Providing accurate census data ensures compliance with IRS regulations.
What if prior-year census data is not provided?
Without required prior-year census data, HCE identification may be incomplete, leading to nondiscrimination testing challenges. If a business was operational but did not provide the data, it could result in corrective measures or penalties. However, if no prior-year data exists due to the absence of a business or 401(k) plan, the current plan year’s information will be used.
Why is prior-year census information required for a 401(k) plan?
Census information is essential for 401(k) plan administration and nondiscrimination testing. It helps determine employee eligibility, calculate contributions, and identify Highly Compensated Employees (HCEs), which is necessary for nondiscrimination testing.
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