1. Dealing with 401k Testing Failures

2. DEALING WITH 401(k) TESTING FAILURES

3. PRESENTATION SUMMARY  Highly Compensated Employees  Actual Deferral Percentage (ADP)/Actual Contribution Percentage (ACP) Tests  Key Employees  Top Heavy Tests  Strategies for Increasing Contributions  Safe-Harbor Options

4. Highly Compensated Employees (HCE)

5.  An active employee who owns at least 5% of the company during the plan year or preceding 12 months  An active employee who receives compensation in excess of $115,000 (2014) in the 12 months prior to the plan year

6. Top Paid Group Election  May be advantageous to a company with a large number of HCEs  Limits the number of HCEs to the highest 20% of employees  Election must be made in the plan document

7. ADP & ACP Tests

8. Elective and matching contributions satisfy the ADP & ACP test respectively if one of the following tests is met  Contribution by HCEs is not more than 125% of contribution by NHCEs  Contribution by HCEs is not more than 2% greater than NHCEs and the percentage for HCEs is not more than 2x the percentage for NHCEs

9. ADP & ACP Tests ADP for NHCEs Max ADP for HCEs Rule Used 12Times 2 24Plus 2 35 46 57 68 79 810Times 1.25 911.25Times 1.25 10 12.5 Times 1.25

10. Correcting ADP/ACP Test Failures  Excess contributions are reclassified  Excess contributions and allocable income are distributed  Employer makes additional contributions to the plan to cause the ADP test to be satisfied

11. Reclassifying Excess Contributions  HCEs over 50 may re-allocate deferrals up to $5,500 (2014) as Catch-Up contributions  Plan document must permit Catch-Up contributions

12. Distribution of Excess Contributions  HCEs receive a refund of contributions and income to bring the plan into alignment with ADP/ACP requirements  Must occur within 2 ½ months of the end of the plan year to avoid 10% excise tax  Must occur within 12 months for elective deferrals to remain tax qualified

13. Testing Year Election  Current Year and Prior Year calculation of NHCE ratios permitted  No IRS approval required for either election but it must be reflected in the plan document  Prior Year calculation provides certainty for HCE contribution limit

14. Key Employee  An officer earning more than $165,000 in 2013  A 5% owner  A 1% owner earning more than $150,000

15. Top Heavy Plan

16.  A 401k plan becomes top heavy if more than 60% of the plan assets belong to key employees  Generally the calculation is performed as of the last day of the plan year and determines plan status for the following year

17. Top Heavy Minimum Contributions  Non-key employees must be provided with a minimum contribution  Generally the minimum contribution will be equal to 3% of compensation  Contribution requirement may be lower if the total contribution for all key employees is less than 3%

18. Top Heavy Strategy  No key employee contributions  Profit sharing contributions may be counted towards top heavy minimum  Matching contributions may be counted toward top heavy minimum

19. Top Heavy Strategy  Contributions made to satisfy ADP/ACP testing may be counted towards top heavy minimum  Converting plan to Safe Harbor 401(k) can automatically satisfy top heavy rules  Adding a Qualified Automatic Contribution Arrangement can automatically satisfy top heavy rules

20. Increasing Contributions  Education works – long term commitment required  Matching contributions have a direct impact  Automatic Enrollment

21. Automatic Enrollment

22.  State wage withholding laws preempted  Automatic Contribution Arrangement (ACA)  Eligible Automatic Contribution Arrangement (EACA)  Qualified Automatic Contribution Arrangement (QACA)

23. Automatic Contribution Arrangement  An employee who fails to make an election to contribute to the plan is treated as having elected to do so  Plan determines contribution percentage  Notice required  Participant may elect to stop contributions by may not take distribution of funds already deposited

24. Eligible Automatic Contribution Arrangement  An employee who fails to make an election to contribute to the plan is treated as having elected to do so  Plan determines contribution percentage  Notice required before plan year  Participant may elect to stop contributions and may take distribution of funds already deposited

25. Qualified Automatic Contribution Arrangement  Can be the same as EACA unless participants are not permitted to direct the investment of their account  Contributions must start at 3% or higher and must be increased to 6%  Avoids ADP/ACP testing, may satisfy top heavy requirement  Required 3% contribution to all eligible or matching $1 for $1 on the first 1% of pay and $0.50 for $1 on next 5% of pay

26. Automatic Contribution Increases  Permitted under all automatic contribution arrangements  Required with Qualified Automatic Contribution Arrangements until contribution percentage reaces 6%

27. Safe Harbor Plans

28.  Avoid ADP/ACP testing requirement  HCEs may contribute full 401k dollar amount ($17,500 in 2014)  May satisfy top heavy minimum requirements

29. Safe Harbor Plans Required employer contributions  Matching contribution - $1 for $1 on the first 3% of pay and $0.50 for $1 on the next 2% of pay OR  3% contribution to all employees who have met the plan’s eligibility requirement

30. Safe Harbor Plans Additional requirement  Safe Harbor contributions must be 100% vested  Employees must receive a Safe Harbor notice 30 days before the beginning of the plan year  Plan document must reflect Safe Harbor election

31. Dealing for 401k Testing Failures