Easy Solutions to Your Failed Non-Discrimination Test

Easy Solutions to Your Failed Non-Discrimination Test 

Easy Solutions to Your Failed Non-Discrimination Test 

Have you failed a 401(k) non-discrimination test this year? Did you or your employees have to take a refund from your 401(k) due to non-discrimination test failure? Have you maxed out your 401(k) contribution for the year? Are you looking to save more of your income, beyond the 401(k) IRS limits? 

You aren’t alone if you or your company failed this year’s 401(k) non-discrimination test. As many as 1 in 3 companies (32%) do fail, according to Anthony McCracken Jr., CFP®, Newcleus Managing Director Retirement Plans.

If your 401(k) plan is not a Safe Harbor plan, then every year it must undergo these non-discrimination tests.   

“If your current qualified plan isn’t a Safe Harbor, then there is a chance you’re going to fail the non-discrimination test and have to address the failure,” said McCracken. “By creating a Safe Harbor plan, you’d fund an equal contribution and bypass on the non-discrimination test.”  This said, Safe Harbor plans can be cost-prohibitive and are not always a viable option for many businesses.  But there are affordable alternative solutions to consider, which remove limitations and help attract and retain your top talent.    


Consider NQDC   

A non-qualified deferred compensation (NQDC) plan may be your answer to resolving qualified plan test failures. 

Contributions are made to NQDC plans just like a traditional 401(k) plan and these contributions are not restricted by IRS limits, which helps an employee bridge the retirement income gap that could occur due to retirement contribution limits with a qualified 401(k) plan that is not supplemented by a NQDC plan.  


Chart demonstrating the retirement gap for HCEs in terms of their 401(k) contribution limits.


NQDC plans can minimize or eliminate the impact of testing failures and enable executives and key employees to take advantage of retirement savings that are not subject to the contribution limits that apply to tax-qualified plans.   

NQDC plans are less expensive because a limited number of employees are participating in the plan, do not require additional employer funding, are more flexible, and can temporarily improve cash flow through a sound financing strategy.  A typical NQDC plan has only a start-up fee and a yearly administrative fee.   The employer has the option to match employee contributions or provide additional financial awards, but this is not required.   


NQDC plans provide:  

  • flexibility and customization 
  • no limits on participation or contributions  
  • access to the funds before the participant reaches the age of 59 1⁄2  
  • strategies for more than retirement savings, such as funding a child’s college tuition 


Stay competitive and keep your top talent  

For the employee you want to retain: When executive salaries and stock options aren’t competitive enough to retain key talent, non-qualified retirement plans provide alternative incentives and investment strategies for highly compensated employees (HCE) by providing them the tools for effective, tax-deferred savings and ways to personalize their retirement strategies.   

For your business: NQDC plans can help ensure the long-term commitment of your key talent, providing leadership continuity and loyalty. The plan can be directly tied to employee performance objectives and tailored to support specific goals of the organization. Additionally, custom employer contributions and vesting schedules enable executives to share in increases and decreases in your organization’s valuation. 


 Is your business a good fit for a NQDC plan?  

If you are concerned about whether your highly compensated employees are saving enough for retirement and need a tax-deferred savings option for those who receive a large percentage of income in incentive pay, NQDC can do this and give you a competitive edge among your peers and industry rivals.  

If your highly compensated employees have experienced contribution limits due to non-discrimination testing, NQDC can bundle tax-deferred savings. 

If you need enhanced employee benefits options as incentives for your senior leadership, NQDC is the answer. 

An NQDC plan provides both retention and retirement benefits.  

If your company recently failed your 401(k) plan non-discrimination test, there are solutions to help make sure your plan won’t fail again. A Newcleus expert in qualified and non-qualified deferred compensation plans will design an appropriate NQDC plan or analyze the effectiveness of your existing NQDC plan.  Relying on an expert who knows how to design and implement these plans is critical to success. If interested, we’re happy to schedule an exploratory conversation.  


Please contact us: 

Richard Pearson
EVP, Chief Client Officer

Anthony McCracken, CFP®
Managing Director, Retirement Plans

Joe Gastaldi AIF ®, C(k)P ®, CBFA ®
Managing Director, Retirement Plans