Understanding Section 401 Nondiscrimination Tests
This chapter provides an overview of Section 401 nondiscrimination tests and discusses how to:
Define highly compensated earnings.
Identify highly compensated employees.
Set up test criteria and plans.
Define the nondiscrimination test run control.
Run nondiscrimination tests.
Understand nondiscrimination test results.
View nondiscrimination test results.
Set limits to comply with test results.
Important! The information in this chapter regarding the
basic and alternate Section 401(k) nondiscrimination tests is based on the
criteria in effect at the time the template was originally designed. It is
not intended to be a guide on how to comply with nondiscrimination testing
or to summarize current legal regulations.
PeopleSoft Benefits provides these nondiscrimination tests for your
use as a template, not to be used for actual reporting.
Understanding Section 401 Nondiscrimination Tests
This section describes:
Basic and Alternate Section 401(k) Tests.
Basic and Alternate Section 401(m) Tests.
The Aggregate Limit Test.
Important! PeopleSoft Benefits provides these nondiscrimination tests for your use as a template, not to be used for actual reporting.
Basic and Alternate Section
401(k) Tests
To be considered nondiscriminatory, a 401(k) plan must meet one of two tests:
The basic Actual Deferral Percentage (ADP) test for Section 401(k) states that the average ADP for highly compensated employees (ADP HCE) cannot be more than a certain percentage of the average ADP for employees who are not highly compensated (ADP NHCE).
The alternate ADP test requires that the ADP HCE cannot exceed the ADP NHCE by more than a certain percentage, provided that the difference between the ADP HCE and the ADP NHCE does not exceed a certain percentage point.
Basic and Alternate Section 401(m) Tests
The basic Actual Contribution Percentage (ACP) test for Section 401(m) states that the average ACP for highly compensated employees (ACP HCE) cannot be more than a certain percentage of the average ACP for employees who are not highly compensated (ACP NHCE ).
According to the alternate 401(m) test, the ACP HCE cannot exceed the ACP NHCE by more than a certain percentage, provided that the difference between the ACP HCE and the ACP NHCE does not exceed a certain percentage point.
The Aggregate Limit Test
If both the ADP and ACP tests do not pass the basic percentage test and both pass the alternative percentage test, the system automatically runs the new Aggregate Limit test when you run the 401(k) or 401(m) NDT report. The Aggregate Limit Test indicates that the sum of the ADP and ACP for the entire group of eligible highly compensated employees cannot exceed the aggregate limit of the nonhighly compensated group, which is the greater of:
The sum of 1.25 times the greater of the ADPNHCE or the ACPNHCE and 1.25 times the greater of the ADPNHCE or the ACPNHCE AND
Two percentage points plus the lesser of the ADPNHCE or the ACPNHCE, with the exception that this cannot exceed two times the lesser of the ADPNHCE or the ACPNHCE OR
The sum of 1.25 times the lesser of the ADPNHCE or the ACPNHCE AND
Two percentage points plus the greater of the ADPNHCE or the ACPNHCE, with the exception that this cannot exceed two times the greater of the ADPNHCE or the ACPNHCE.
The results of the Aggregate Limit Test appear on the new Section 401 Results page after the 401(k) and 401(m) reports have been run. If you view the Section 401 Results page before you run one or both of these reports, the Aggregate Limit Test portion of the Section 401 Results page will be blank.
Defining Highly Compensated Earnings
Before you run a nondiscrimination test, define the highly compensated earnings to be processed in the nondiscrimination test.
To define highly compensated earnings:
Define a special accumulator for highly compensated earnings.
Link that special accumulator to the appropriate earnings.
Important! PeopleSoft software provides these nondiscrimination tests for your use as a template, not to used for actual reporting.
See Also
Establishing Earnings Programs
Identifying Highly Compensated Employees
Now that the parameters for running nondiscrimination testing are defined, you must identify employees who are highly compensated employees (HCE) using the Job Data (JOB_DATA) component.
A highly compensated employee is defined as someone who meets one of the following criteria:
Was a 5 percent (or more) owner of the organization at any time during the current or preceding year.
Received more than an indexed compensation amount in the preceding year.
Received more than an indexed compensation amount in the preceding year, and was among the most highly paid 20 percent of employees in the organization.
An active employee is not treated as highly compensated in the current (determination) year if that employee was not considered highly compensated in the preceding (look-back) year. This rule does not apply if the employee is a 5 percent (or more) owner. The system does not classify employees hired during the current year as highly compensated employees unless they also are or were a 5 percent (or more) owner during the current year.
To identify employees who are 5 percent (or more) owners:
Access the Work Location - Employment Information: Employment Data page.
Select the Owns 5% (or More) of Company check box to identify an employee as a 5 percent or more owner.
See Also
Setting Up Test Criteria and Plans
To set up nondiscrimination testing, use the nondiscrimination testing (NDT_HCE_TABLE_GBL) component.
You can perform nondiscrimination tests for 401(k) and 401(m) plans. For 401(k), the system uses before-tax amounts. For 401(m), it uses after-tax amounts. Perform these tests according to IRS criteria that you define, for the benefit plans that you identify.
Important! PeopleSoft software provides these nondiscrimination tests for your use as a template, not to use for actual reporting.
Page Used to Set Up Test Criteria and Plans|
Page Name |
Definition Name |
Navigation |
Usage |
|
NDT_HCE_TABLE |
Set Up HRMS, Product Related, Base Benefits, Nondiscrimination Rules, Nondiscrimination Rules |
Define the regulatory rules governing your nondiscrimination testing. |
Setting Up Test Parameters
Access the Nondiscrimination Rules page. (Set Up , Product Related, Base Benefits, Nondiscrimination Rules, Nondiscrimination Rules)
|
Effective Date |
Enter the effective date for your nondiscrimination test criteria. The effective date enables you to maintain a history of your test criteria. |
HCE Determination Criteria
|
Compensation Minimum |
Set up the system to account for all employees who have received the compensation minimum, or narrow the determination down to those employees who received the compensation minimum and who are among the most highly paid (top 20 percent) employees in your organization. You can change this percentage. |
|
Minimum Age and Minimum Service Months |
To set up your system to exclude certain employees from the determination of the top paid 20 percent of employees in your organization, enter the appropriate minimum age or minimum service months. Because HCE determination is based upon the previous year's wages, the system refers to the end of the previous year when checking these values against the employee population. If you are running your nondiscrimination test for the current plan year and you've set a minimum age of 21, the top 20 percent group will be reduced by the number of employees who have not reached age 21 by the end of the previous plan year. |
ADP Calculation Criteria
|
Annual Compensation Lmt (annual compensation limit) and Annual Contribution Lmt (annual contribution limit) |
Enter the annual compensation limit and annual contribution limit for the test. |
|
Calculate using |
Select which year's data to use to perform the ADP and ACP calculations. The options are Current Year and Previous Year. |
Note. Because the nondiscrimination testing procedure for
401(k) and 401(m) plans includes compensation data from the preceding plan
year, you should use the results of the tests to better forecast for the current
year. This is because the preceding year compensation data is used to calculate
actual deferral percentages and actual contribution percentages for the nonhighly
compensated employee (NHCE) population, upon which nondiscrimination test
results are based. With these figures defined, you can monitor your HCE population
for compliance.
If you choose to perform nondiscrimination testing using previous year
NHCE data, You do not need to perform NHCE forecasting; you need to forecast
only HCE data and compare it to the previous year's data. You can still elect
to test based on the current year's data, however, and use the forecasting
feature to help monitor your plan's nondiscrimination status throughout the
year.
Identifying Benefit Plans to Include in a Test
To identify benefit plans to include in NDT testing:
Access the Benefit Plan Table page.
Select the Include in Nondiscrimination Testing check box.
The test will include all of the benefit plans with this check box selected. This option is available for all savings plans.
See Also
Defining the Nondiscrimination Test Run Control
After you set up your special accumulators and their associated earnings, set up the parameters for your nondiscrimination test through run control pages.
Important! PeopleSoft software provides these nondiscrimination tests for your use as a template, not to use for actual reporting.
This section discusses how to
Define special accumulators and company and pay group criteria.
Define section 129 rules.
Pages Used to Define the Nondiscrimination Test Run Control|
Page Name |
Definition Name |
Navigation |
Usage |
|
RUNCTL_NDT |
Benefits, Conduct Nondiscrimination Tsts, Section 401 Testing, Define Test Information, Define Test Information |
Define the special accumulator that you want the system to use, and identify the company and pay group combinations that you want to include in your test. |
|
|
RUNCTL_129 |
Benefits, Conduct Nondiscrimination Tsts, Section 129 Testing, Define Test Information, Define Test Information |
Define Section 129 rules to specify information that controls nondiscrimination testing for Section 129 dependent care reimbursement accounts. |
Defining Special Accumulators and Company and Pay Group Criteria
Access the Define Test Information page for Section 401 testing (Benefits, Conduct Nondiscrimination Tsts, Section 401 Testing, Define Test Information, Define Test Information).
|
Plan Year Begin Date |
Enter the first day of the plan year to use for the test. |
|
Month End Date |
Enter the month end date through which compensation data will be in the database. |
|
Year End Projection Percentage |
Enter the percentage that you want the system to use. When testing for the current year, this field enables you to define whether the system projects until year-end. |
|
Special Accumulator Code |
Enter the special accumulator code for the test. The system uses this accumulator to determine employee compensation for the test. |
|
Benefits Base |
Enter the benefits base that you want to use, either Annual Rate or Annual Benefits Base Rate. For example, suppose that you initiate a test for the current year on May 31, but you want projections until the end of the plan year. You need to project for the remaining 7 of the total 12 months, which means that you enter 58.33% as the year end projection percentage. |
|
Year Code |
Indicate whether testing is for the Current and Prior Plan Year, the Current Plan Year, or the Prior Year. Because the rules for the determination of highly compensated employees determines HCE status based primarily upon the previous year's data, the system must gather salary information for the previous year and store it. When you run a Section 401 test for the first time in the testing year, always select Current and Prior Plan Year on the 401 NDT Run Control page. In subsequent testing throughout that year, you can select Current Plan Year. |
NDT Section 401
|
Company and Pay Group |
Identify the companies and the pay groups that you want to include in this test. |
Defining Section 129 Rules
Access the Define Test Information page for Section 129 testing (Benefits, Conduct Nondiscrimination Tsts, Section 129 Testing, Define Test Information, Define Test Information).
|
Special Accumulator Code |
Enter the special accumulator code for the test. The system uses this accumulator to determine employee compensation for the test. |
|
Plan Year Begin Date |
Enter the beginning date for the plan year that you want to use for the test. |
|
Month End Date |
Enter the month end date through which compensation data will be in the database. |
|
Benefits Base |
Enter the benefits base—either Annual Rt or Benef Base. |
|
Year Code |
When you run a Section 129 test for the first time in the testing year, always select Both Years on the 129 NDT Define Test Information page. In subsequent testing throughout that year, you can select Current Yr. Note. The system requires you to always select the Both Years option if you will be testing based on Separate Lines of Business (SLOB). You can choose from Both Years, Current Yr, or Prior Yr. |
|
Exclusion Min Service Months (exclusion minimum service months) |
Enter the minimum length of service for employees included in the test. |
|
Exclusion: Minimum Age |
Enter the minimum age limit for the employees included in the test. |
Employee Test Population
|
Company and Pay Group |
Identify the companies and the pay groups that you want to include in this test. |
SLOB (Separate Line of Business) Criteria for the 55% Test
Select the method of restricting the test population. You can restrict the test population by company and pay group or by SLOB.
|
Cafeteria Plan |
Select this check box if you have a flexible benefits or cafeteria plan. |
|
Dollar Limit |
Enter the earnings amount below which you want the system to exclude employees from the Section 129 test. Companies that have cafeteria plans typically set the dollar limit to $25,000, but it can be set lower. If you set the limit to $25,000, employees who earn less than that amount will be excluded from the Section 129 test. |
|
Minimum Employee Count |
Enter the minimum number of employees for a separate line of business to be included in the test. |
|
Company and Pay Group |
If you use SLOB, indicate the company and pay group that are associated with each separate line of business. |
Running Nondiscrimination Tests
This section discusses how to:
Determine the number of highly compensated employees.
Run 401(k) and 401(m) testing.
Run Section 129 nondiscrimination testing.
Important! PeopleSoft software provides these nondiscrimination tests for your use as a template, not to use for actual reporting.
Pages Used to Run Nondiscrimination TestsDetermining the Number of Highly Compensated Employees
Access the Identify Highly Comp Employees page (Benefits, Conduct Nondiscrimination Tsts, Section 129 Testing or Section 401 Testing, Identify Highly Comp Employees, Identify Highly Comp Employees).
Warning! Before determining the number of highly compensated employees, first set the nondiscrimination test parameters.
|
NDT Test Type |
Choose from the following values: Std NDT (Standard Nondiscrimination Test, for Section 401 plans), 129 NDT (Section 129 Nondiscrimination Test), and 129 SLOB (Section 129 Separate Line of Business Nondiscrimination Test). |
Running 401(k) and 401(m) Testing
Access the 401(k) Nondiscrimination Test - Run Control page (Benefits, Conduct Nondiscrimination Tsts, Section 401 Testing, 401(k) Nondiscrimination Test, Run Control) or the NDT Section 401(m) Testing page (Benefits, Conduct Nondiscrimination Tsts, Section 401 Testing, 401(m) Nondiscrimination Test, NDT Section 401(m) Testing).
Warning! Before running a nondiscrimination test using this page, you must first set the nondiscrimination test parameters in the 401 NDT Run Control page and determine the number of highly compensated employees in the NDT 401 HCE Test page.
When the system performs a test, it uses the total eligible earnings for employees. For total earnings, the system uses the earnings balance for the special accumulator that you defined in the run control for this test.
If an employee works in multiple companies, the system accumulates earnings for all the companies that you marked for nondiscrimination testing.
Running Section 129 Nondiscrimination Testing
Access the appropriate Section 129 NDT page.
Note. For SLOB users, the SLOB rules apply only to the NDT 129 55% Average Benefits test. If you want to run this test for separate lines of business, use the following procedure:
To run the Section 129 SLOB testing process:
Run the Highly Compensated Employees determination test.
Select 129SLOB as your NDT Test Type.
Run the NDT 129 55% Average Benefits test.
Rerun the Highly Compensated Employees Determination test.
This time, select 129NDT as your NDT Test Type.
Run the remaining NDT 129 tests.
Warning! Before running a nondiscrimination test using this page, first set the nondiscrimination test parameters in the 129 NDT Define Test Information page and determine the number of highly compensated employees in the 129 Identify Highly Comp Employees page.
When the system performs a test, it uses the total eligible earnings for employees. For total earnings, the system uses the earnings balance for the special accumulator that you defined in the run control for this test.
If an employee works in multiple companies, the system accumulates earnings for all the companies that you marked for nondiscrimination testing.
Understanding Nondiscrimination Test Results
As a result of a nondiscrimination test, the system updates employee data for the current and previous year tests using these codes:
|
N |
Indicates that an employee is not eligible for the plan. |
|
E |
Indicates a highly compensated employee who is not a 5 percent owner. |
|
H |
Indicates a highly compensated employee (who may be a 5 percent owner). |
The Savings Plan election page displays the Highly Compensated check box for the current year only. The previous year's highly compensated flag is not available online.
Important! PeopleSoft software provides these nondiscrimination tests for your use as a template, not to use for actual reporting.
Viewing Nondiscrimination Test Results
This section discusses how to:
View results for an individual.
View Section 401 test results for all employees.
View Section 129 test results for all employees.
Run nondiscrimination test reports.
Important! PeopleSoft provides these nondiscrimination tests for your use as a template, not to use for actual reporting.
Pages Used to View Nondiscrimination Test Results|
Page Name |
Definition Name |
Navigation |
Usage |
|
SAVINGS_PLANS1 |
Benefits, Enroll In Benefits, Savings Plans, Savings Plans |
View nondiscrimination test results for an individual. |
|
|
NDT_401_RESULTS |
Benefits, Conduct Nondiscrimination Tsts, Section 401 Testing, Review Test Results, Review Test Results |
View the nondiscrimination test results for all employees in 401(k) and 401(m) tests. |
|
|
NDT_129_RESULTS |
Benefits, Conduct Nondiscrimination Tsts, Section 129 Testing, Review Test Results, Review Test Results |
View the nondiscrimination test results for all employees. |
Viewing Results for an Individual
Access the Savings Plan page (Benefits, Enroll In Benefits, Savings Plans, Savings Plan).
As a result of the last nondiscrimination test that you performed, the system indicates that an employee is highly compensated (based on the current year) by displaying the Highly Compensated indicator at the top of the page.
See Also
Enrolling Participants in Benefit Programs and Plans
Viewing Section 401 Test Results for All Employees
Access the Review Test Results page for 401(k) (Benefits, Conduct Nondiscrimination Tsts, Section 401 Testing, Review Test Results, Review Test Results).
|
Average for HCE (average for highly compensated employees) and Average for NHCE (average for nonhighly compensated employees) |
The system report the average actual contribution percentage (ACP) and actual deferral percentage (ADP) for highly compensated and nonhighly compensated employees. |
|
Basic 125% Test and Alternate 2% Test |
The systems automatically indicate a Pass or Fail status. |
|
Discriminatory Excess |
If both the Basic and Alternate 2% tests failed, the system displays the discriminatory excess percentage. |
|
Aggregate Limit Test |
If the system runs this test, it automatically indicates a Passed or Failed status. |
Viewing Section 129 Test Results for All Employees
Access the Review Test Results page for 129 (Benefits, Conduct Nondiscrimination Tsts, Section 129 Testing, Review Test Results, Review Test Results).
This page displays the results of the Eligibility Cross-Section test, the 55% Average Benefit test, and the 5% Owner Concentration test. If you elected to test for separate lines of business, the Separate Line of Business check box is selected.
Running Nondiscrimination Test Reports
You can produce nondiscrimination testing reports that provide a breakdown of the testing results by employee (divided into highly compensated employee and nonhighly compensated employee groups) as well as a display of the calculations involved in the test.
401 Nondiscrimination Testing reports also show the results of the Aggregate Limit test if test result conditions require this test to be performed.
See Also
Setting Limits to Comply with Test Results
To comply with the regulations governing nondiscrimination testing, you may need to change the savings limits for a highly compensated employee for a specific benefit plan. This applies only to 401(k) and 401(m) plans.
See Also