Judy Diamond Associates Analysis Reveals 57,000 401(k) Plans Failed Nondiscrimination Testing

Washington, D.C., June 24, 2014 – Judy Diamond Associates, the 401k plan intelligence provider of leading financial advisors, brokers and fund companies, today released a study revealing that 57,277 401(k) plans failed their most recent IRS nondiscrimination tests. These plans were required to return $794 million in 401(k) contributions to highly compensated employees, resulting in increased income taxes and lower retirement savings for the impacted participants.

As a check on plan design fairness, the IRS requires that both highly compensated plan participants and the rank-and-file plan participants contribute at similar rates to their 401(k) plans. In cases where owners and managers contribute at far higher rates than their workers over the course of the year, the plans must return some of the more highly compensated employees’ savings, which then become subject to normal income taxes. These payments are known as corrective distributions.

“The issuance of corrective distributions should serve as a red flag to financial advisors who are looking for opportunities to increase their 401(k) business,” said Eric Ryles, managing director of Judy Diamond Associates. “It means that the plan has highly compensated employees who were unable to save as much for their retirements with pre-tax income as they would like. It may also mean that the plan is not designed to encourage workers to contribute sufficiently. Plan advisors can utilize this information in their prospecting efforts by introducing retirement education programs and suggesting better 401(k) savings incentives as a part of their proposal.”

Advisors will also find that plans that issue corrective distributions commonly have other issues with their design, according to research by the IRS. These may include inadequate fidelity bonds, incorrect calculation of vesting schedules or failure to amend plans in a timely period to conform with current laws and regulatory changes. Searching for plans with these and other warning signs is possible with Retirement Plan Prospector.

Retirement Plan Prospector, which is an intuitive and comprehensive online sales prospecting and plan analysis tool providing insights to the defined contribution and defined benefits markets, makes finding plans that issued corrective distributions very easy. “Prospector includes more than a dozen Red Flags, including one for plans that issued corrective distributions,” said Ryles.

Some interesting highlights from this research include:

  • Nationwide, 12% of 401(k) plans issued corrective distributions in 2012, the most recent year for which a complete set of plan data was available.
  • Corrective distribution issuance was down about 2% from the previous year.
  • Small states, proportionally, had fewer plans that issued corrective distributions than big states – most likely reflecting the locations of highly compensated workers.


Top and bottom states by percent of plans that issued corrective distributions for the 2012 plan year:

Top States % of Plans issuing corrective distributions   Bottom States % of Plans issuing corrective distributions
1 Kansas 13.03%   50 Montana 6.18%
2 Texas 12.79%   49 Hawaii 7.24%
3 New Jersey 12.49%   48 Wyoming 7.61%
4 Georgia 12.12%   47 West Virginia 7.93%
5 Alabama 11.95%   46 Idaho 8.01%


Judy Diamond Associates based this research on the most recently available complete set of 401(k) plan disclosure documents released by the Department of Labor, which are available in its Retirement Plan Prospector database.

For more information about this research, please contact us at www.judydiamond.com/about/contact or follow us on Twitter @401kFacts.


Media Contact
Regina Marie Glick
[email protected]

Sales Contact
Eric Ryles
[email protected]

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