Nearly 60,000 401(k) plans failed their most recent nondiscrimination tests, according to research by Judy Diamond Associates.
The IRS requires highly compensated plan participants and rank-and-file employees to contribute similar rates to their retirement plans. If the IRS finds an imbalance that favors wealthier employees, plans are required to return contributions to employees, after which the money is taxed as regular income. The process is known as a corrective distribution.
Judy Diamond Associates, a retirement plan data publisher and a division of LifeHealthPro’s parent company, Summit Professional Networks, found that 57,277 401(k) plans failed their most recent nondiscrimination tests.
In 2012, the year for which the most recent data is available, $794 million in contributions were returned to highly compensated employees. Nationwide, 12 percent of 401(k) plans issued corrective distributions, Judy Diamond Associates said, about 2 percent down from the previous year.
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Small states, proportionally, had fewer plans that issued corrective distributions than big states, most likely a reflection of where highly compensated workers can be found.