IRS Compliance Testing: 415 Limits Testing

IRS compliance testing: 415 limits testing

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

415 limits, employee benefit plansTo ensure employee benefit plans do not violate certain standards that the DOL and IRS believe are important, plans are subjected to annual compliance tests. These tests are designed to make sure the amounts employees are deferring is within certain maximum limits and that plans are not operating in a manner that discriminates against certain classes of employees. The most common compliance testing performed by defined benefit plans on an annual basis are the ADP and ACP tests, the top-heavy test, the multiple use test and the 415 limits testing.

415 Limits testing 

Internal Revenue Code Section 415 limits the employer-provided benefits participants can accrue in defined benefit plans and the amounts that can be contributed to defined contribution plans. The code specifies the amount of contributions (annual additions) that may be allocated to an employee for a “limitation year.” Generally, a limitation year is the calendar year, unless otherwise stated in the plan document. Annual additions include:

  • Employee deferral contributions
  • Employer matching contributions
  • Employer discretionary profit sharing contributions
  • Forfeitures allocated to participants’ account

Third-party administrators perform the 415 limits test annually to determine whether or not participants are within the guidelines set forth by the code. If the guidelines are exceeded, the tax-qualified status of your plan may be jeopardized. The employee’s compensation, as defined by the plan document, used for the 415 limits test is provided to the third-party administrator by the plan sponsor. The IRS may adjust the 415 limit annually for cost of living increases.

Your third-party administrator should provide details of any required actions as a result of any test failures.

At Henry+Horne, we pride ourselves on our employee benefit plan audit services. If you have any questions on 415 limits testing, or questions about employee benefits plans in general, you are welcome to contact a Henry+Horne audit professional. We are ready to answer any questions you may have.

Joe Goodmiller