Must a 401(k) plan meet certain tests?
The 401(k) plan must meet a mathematical test (called ADP test) to ensure that there is not too great a difference between the contributions of highly and non-highly compensated employees. This test is designed to ensure that the plan is not merely a tax-shelter that only benefits the highly paid. If the test fails, the employer can either make additional contributions on behalf of the non-highly compensated employees or refund excess contributions made by highly compensated employees. If the excess is not distributed within 2½ months following the end of the plan year, the employer must pay 10% penalty tax on the excess. NOTE: 401(k) plans that satisfy certain requirements are safe harbor 401(k) plans, and deemed to satisfy the ADP test. This means that no testing would be required and all highly compensated employees could defer up to the 402(g) dollar limit plus catch-up contributions, regardless of what non-highly compensated employees defer. For a detailed description of safe harb
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