There are a few types of 401(k) plans available to plan sponsors: the traditional 401(k), the Roth 401(k), the SIMPLE 401(k), and the Safe Harbor 401(k). Each plan has different benefits and drawbacks, but they all share one common feature: a requirement that the plan sponsor abides by that specific plan’s rules and regulations. Most 401(k) plans face an annual nondiscrimination test defined by the Internal Revenue Service (IRS), which ensures that the plan does not excessively favor highly compensated employees (HCEs) and that their contributions do not exceed the average contributions of non-highly compensated employees (NHCEs) by set limits. Failing to adhere to the IRS’s rules can risk the loss of the 401(k)’s preferable tax status and can be subject to penalties.
