My 401(k) plan test failed... now what?

12 Insightful Strategies to Manage Test Failures

1. Is my data correct?

Look and verify your data. Make sure it is correct especially reviewing the status of active and terminated employees. Not having your employee's status correct in the census could affect your testing information.

2. Is there another way?

Ask your TPA or Recordkeeper for an alternate testing method.

3. Refund your employees

Take corrective measures - Refund the amount necessary to Highly Compensated employees. Make sure to communicate to those that would receive contributions, so they are not taken off guard. Provide them with a baseline to help mitigate refunds in future years if you anticipate failing testing again.

4. Reduce contributions

Reduce contributions to your highly compensated by making an employer contribution(QNEC) or a (QMC) to meet the testing requirement.  

5. Educate employees

Help employees understand the importance of saving in a way that is easy and understandable. Walk them through the advantages of saving pre-tax and via Roth. Also, mention to those that qualify what the IRS tax Credit can do for them. They typically don't realize the tax savings for participating in a plan.  

6. Financial Wellness

Employ a different tactic through Wellness campaigns and visual communication. 

7. Target the right employees

Education targeted to a specific demographic that statistics show low participation can be effective especially if you can speak to them in what matters most to them. 

8. Motivate employees

Make it a manager's goal to motivate their employees to save. Maybe, an incentive for managers to help this task become a priority.

9. Make your match go far

Create a matching structure that emphasizes more deferral participation. Instead of 50% up to the first 6% what about .25% for every 1% up to 12% of pay? Same match amount but a requirement to save more to get there.

10. Auto… Auto… Auto…

Auto enroll and auto escalation. Studies show that adding auto enroll yields positive outcomes and quite often most won't opt out of being auto enrolled. Auto escalation. that is right every year auto escalate deferral rates by 1% until a cap is met at 10% or up to 15%. Don't be scared!!! The responsibility is on the employee to opt out of this program and they have time to do so.

11. Educate and Communicate

Be in front of your employees as much as possible. Don't overwhelm them but provide them with a group and one on one consultations to help them get the best value and assistance possible

12. Mid Year Test

That is right. Run a test midyear to see your progress and adjust accordingly.

This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.