Fines and Settlements from Failed Discrimination Testing in Employee Benefit Plans
Definition
Employee benefit plans like 401(k)s fail coverage testing or benefits testing, discriminating in favor of highly compensated employees (HCEs). This leads to IRS disqualification of the plan, requiring corrective distributions or contributions. Systemic issues arise from ignoring controlled group rules under Sections 414(b) and 414(c), treating related entities as one employer for testing.
Key Findings
- Financial Impact: $100,000+ per plan annually in corrections and penalties
- Frequency: Annually during plan audits
- Root Cause: Inadequate aggregation of controlled group entities and overlooking coverage tests in favor of easier benefits tests like ADP/ACP
Why This Matters
This pain point represents a significant opportunity for B2B solutions targeting Insurance and Employee Benefit Funds.
Affected Stakeholders
Plan Administrators, HR Directors, Benefits Consultants, Third-Party Administrators
Deep Analysis (Premium)
Financial Impact
$100,000-$180,000: $40K-$70K in corrective contributions; $25K-$50K in IRS penalties; $20K-$30K in amended 990-N filing and legal review; $15K-$30K in staff time reprocessing • $100,000-$200,000: $50K-$100K in corrective contributions (delayed action means larger corrections); $25K-$50K in actuary time (billing at $300-$500/hr for 100+ hours); $10K-$25K in IRS penalties for late correction filing; $15K-$25K in legal review of corrective action • $100,000-$250,000 per testing failure (corrective payments, penalties); government contract suspension risk if plan disqualification occurs; audit findings delay contract payments; reputation damage with federal agencies
Current Workarounds
Actuary calls HR to verify if leave-of-absence participant should be included in ADP test; receives contradictory guidance (payroll says include, HR says exclude); actuary reviews plan document language; methodology unclear • Actuary consults with legal; exchange emails with Plan Sponsor's Benefits team about which units qualify; receives org chart changes at year-end; re-runs testing with different disaggregation; results now show different units pass/fail • Actuary receives failing test result from TPA via email; recalculates using proprietary methodology (often different from TPA's); sends to employer via PDF report; employer questions numbers; actuary provides Excel with formulas; multiple rounds of revision before settlement
Get Solutions for This Problem
Full report with actionable solutions
- Solutions for this specific pain
- Solutions for all 15 industry pains
- Where to find first clients
- Pricing & launch costs
Methodology & Sources
Data collected via OSINT from regulatory filings, industry audits, and verified case studies.
Related Business Risks
Overpayments from Unreconciled Employee Benefit Contributions
Regulatory Non-Compliance from Inadequate Reconciliation Procedures
Unreconciled Premium Contributions Leading to Revenue Loss
Excise Taxes and Plan Disqualification from RMD Processing Failures
Administrative Bottlenecks from Unresponsive Participants in RMD Processing
IRS Qualification Failures from Inadequate Hardship Withdrawal Documentation
Request Deep Analysis
🇺🇸 Be first to access this market's intelligence