3802 / How does a 401(k) plan satisfy the nondiscrimination in amount requirement?

A cash or deferred arrangement will be treated as meeting the nondiscrimination requirement of IRC Section 401(a)(4) if it satisfies the Actual Deferral Percentage (“ADP”) test ( Q 3803).¹ A plan can satisfy the ADP test by annually meeting the requirements of the ADP test itself, by satisfying the design-based requirements for a SIMPLE 401(k) plan ( Q 3778), or by satisfying the design-based requirements for a safe harbor plan ( Q 3773).²

In plan years beginning after December 31, 2007, a “qualified automatic contribution arrangement” will satisfy the ADP test requirement ( Q 3762).³ The final regulations cited here took effect for plan years beginning on or after January 1, 2006.⁴

A plan will not be treated as violating the ADP test merely on account of the making of (or right to make) catch-up contributions by participants age 50 or over under the provisions of IRC Section 414(v) so long as a universal availability requirement is met ( Q 3761).⁵

Salary reductions that give rise to the saver’s credit ( Q 3648) may be taken into account for purposes of satisfying the ADP test.⁶ If the plan provides for employee after-tax contributions or employer matching contributions, those contributions must meet the requirements of IRC Section 401(m) ( Q 3804). If the plan includes a profit sharing component (i.e., nonelective contributions that are not QNECs, other than as part of one of the designs explained in Q 3778 and Q 3773), that portion of the plan will be subject to nondiscrimination in amount testing ( Q 3848).

A cash or deferred arrangement in which all of the eligible employees for a plan year are highly compensated employees ( Q 3930) will be deemed to satisfy the ADP test for the plan year.⁷ A 401(k) plan also is subject to age and service, coverage, and other requirements ( Q 3753).

Final regulations treat all governmental plans (within the meaning of IRC Section 414(d)) as meeting the coverage and nondiscrimination requirements.⁸ The IRC states that state and local governmental plans, to the limited extent that they are eligible to offer a cash or deferred arrangement ( Q 3753), meet the requirements of IRC Section 401(k)(3).⁹ Under earlier guidance, plans established and maintained for its employees by the federal government or by any agency or instrumentality of it, are treated as meeting the requirements of IRC Section 401(k)(3) until the first day of the first plan year beginning on or after the date final regulations were issued (December 29, 2004).¹⁰