The Keys to 401(k) Compliance Testing Success
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The Keys to 401(k) Compliance Testing Success (Made Simple)
Running a 401(k) plan for your business? Great! But did you know you have to make sure it’s fair for everyone—and that it follows the rules set by the IRS and Department of Labor? That’s where 401(k) compliance testing comes in.
Let’s break it down so you can pass your tests, avoid penalties, and help your employees save for retirement.
What Is 401(k) Compliance Testing?
Every year, businesses with 401(k) plans must go through nondiscrimination testing. This checks if your plan treats all employees fairly, especially when it comes to how much money is being saved.
If your plan gives too much love to the top earners and not enough to everyone else, you could fail the test.
What’s a Mid-Year 401(k) Test?
Think of it like a practice test. A mid-year 401(k) compliance test gives you a sneak peek at how your plan is doing before the real test hits in Q1. It’s a smart way to catch problems early and fix them before they become expensive mistakes.
Do All Retirement Plans Face Compliance Testing?
Many (but not all) employer-sponsored retirement plans must go through compliance testing each year to make sure they’re in line with the government’s rules and regulations.
Some plans don’t require as much testing; Safe Harbor Plans, for example, avoid most testing by committing to a minimum benefit that’s offered to all employees across the board. For the rest, the rules apply.
In short, these rules make sure employers put the right amount of money into 401(k) plans for all eligible workers—and that no group of employees is treated unfairly. Most of the rules focus on people called Highly Compensated Employees (HCEs), who earn more or own part of the company.
Who Is a Highly Compensated Employee (HCE)?
An HCE is someone who:
- Owns 5% or more of the company (including family members), or
- Made over a certain income last year (for example, $160,000 for 2025)
These folks often save more in their 401(k)s, but the rules say they can’t save too much more than everyone else. That’s why testing matters.
If a 401(k) plan doesn’t meet the rules, the company usually has to make changes to pass the test. That might mean giving back extra savings to HCEs (also known as corrective distributions) or adding more money to the accounts of Non-Highly Compensated Employees (NHCEs) to even things out.
3 Keys to Acing 401(k) Compliance Testing
Here’s how to make sure your plan passes with flying colors:
Keep Your Employee Data Clean
Your provider uses employee census data (like payroll and HR info) to run the test. If your data is messy or outdated, your results could be wrong.
Review it regularly and consider syncing your payroll system with your 401(k) provider to keep everything accurate.
Review Your Test Results Carefully
Don’t just glance at the results—go over them with your service provider. Make sure they used the right data and explain why you passed or failed clearly.
The best way to do this is by requesting a full walkthrough of your test results. This allows you to catch small mistakes now, saving you a big headache later.
Make a Game Plan for Next Year
Whether you passed or failed, use what you learned to improve your plan.
Consider:
• Switching to a Safe Harbor 401(k) plan, which automatically passes most tests
• Offering more education to employees to boost participation
• Adjusting contributions to make things more balanced
Whatever action you choose, don’t wait until next year to implement changes to your plan.
Important 401(k) Compliance Testing Deadlines
Here’s a quick overview to keep you on track:
- January: Review and clean up last year’s payroll and employee data by the end of the month
- February–March: This is typically when service providers perform compliance tests and share the results
- March 15: Deadline for fixing failed tests to avoid penalties (like giving back extra contributions)
- April 15: Deadline for any required corrective distributions for those that exceed the IRS contribution limits
- July 31: Ideal time for a mid-year 401(k) test to prep for next year (optional but suggested)
Check out our Compliance Calendar and Checklist below for a comprehensive guide to all important compliance deadlines.
Final Thoughts
401(k) compliance testing isn’t just about following rules—it’s about making sure your retirement plan works for everyone. With a little planning, clean data, and a smart strategy, you can pass your tests and help your team build a better future.
Need help? Contact us to talk to a Fisher\SMB retirement specialist about compliance needs for your business.
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Additional Resources
What Every 401(k) Admin Should Know About Corrective Distributions
Even companies with a great retirement plan can fail compliance testing. If your 401(k) distributions are found to be “top-heavy,” you may need to make corrective distributions. Here’s what you should know about why plans fail and how to stay compliant in the future.
2025Compliance Calendar and Checklist
The 401(k) Compliance Calendar and Checklist makes it easy to stay ahead of important deadlines throughout the year. Use this downloadable tool to stay on top of key 401(k) dates, making plan administration quicker and easier.
9 Essential Questions About Safe Harbor 401(k) Plans
Discover how Safe Harbor 401(k) plans help business owners avoid compliance testing, maximize contributions, and support employee savings. Learn about plan types, benefits, and when it makes sense to upgrade.