401(k) Plan Nondiscrimination Testing Strategy After an Acquisition

Annual 401(k) nondiscrimination testing is typically performed by a plan’s recordkeeper as part of its service agreement, since the recordkeeper maintains the participant-level data required to complete the testing. Plan sponsors frequently call upon SBA to review their nondiscrimination testing results, confirm the integrity of the underlying data, identify plan design and process adjustments, or handle complex test situations that may improve future outcomes.

In this case, however, a supermarket corporation had recently acquired another grocery operation, bringing two separate 401(k) plans with different recordkeepers under one controlled group. Both plans failed their Annual Deferral Percentage (ADP) tests for the year, triggering corrective refunds to highly compensated employees.

If tested separately, the two plans would have required refunds totaling over $180,000. Because the plans were administered by different recordkeepers and neither had access to the other’s data, an aggregated test could not be performed without outside support. Before issuing substantial refunds, the CFO sought independent expertise from SBA to determine whether a compliant, more favorable outcome was possible.

SBA gathered ADP testing data from both recordkeepers and evaluated whether the results could be improved by testing on an aggregated basis for the newly formed controlled group.

The team then reviewed the individual nondiscrimination tests completed by each recordkeeper, validated participant-level data including compensation, deferrals, hire dates, age, and eligibility classifications, and recalculated the testing results using a combined data set. By treating the two plans as a single plan for testing purposes, while still applying permitted age and service exclusions, SBA identified a materially improved outcome that remained fully compliant with IRS regulations.

After confirming the revised testing results, SBA prepared detailed correction data for each recordkeeper to process in accordance with the aggregated approach.

Aggregated testing reduced corrective refunds by approximately 97%. The number of participants requiring corrective distributions was cut by more than half, with total refunds reduced to just over $5,000 rather than the originally projected $180,000.

Both recordkeepers processed the corrections before the IRS deadline, enabling the company to meet all compliance requirements while preserving the vast majority of employee retirement contributions in the plan.