Smarter Plan Design: How to Maximize Contributions and Prevent Compliance Failures

Mar 13, 2026

For employers, the purpose of a 401(k) or retirement plan goes beyond providing a benefit for rank-and-file employees — it’s a strategic tool for retaining executives and helping them maximize tax-advantaged savings.

But there’s a catch: IRS nondiscrimination rules tie executive contribution limits directly to participation among rank-and-file employees. When broad participation is low, executives can find their own savings unexpectedly restricted or even refunded. In fact, roughly 30% of traditional 401(k) plans fail one of the two main nondiscrimination tests issued by the IRS each year, which typically carry monetary penalties.

The good news? These problems are rarely unexpected. In most cases, they’re easily preventable with thoughtful plan design.

The challenge for plan sponsors

Retirement plan compliance is an annual pressure point for U.S. employers. Every year, plan sponsors have to sort through data inconsistencies, evolving rules, and administrative complexity — and, in the end, they still face potential penalties or corrective actions from the government.

The IRS subjects every plan to testing rules designed to ensure fairness, with the main goal of preventing highly-compensated employees from receiving disproportionate benefits. Two of those nondiscrimination tests are the ADP and ACP reviews:

ADP — Actual Deferral Percentage — evaluates the value of deferrals across different salary levels in a company. ADP is designed to ensure that executives aren’t saving a much higher percentage of their pay than rank-and-file employees. This includes pre-tax contributions to Roth and 401(k)s, excluding catch-ups.

ACP — Actual Contribution Percentage — also evaluates the disparity between highly-compensated employees and other workers, but it considers after-tax contributions and employer matches.

Companies frequently fail one of these tests if rank-and-file employees defer too little pre-tax salary or if there are significant disparities with after-tax contributions. In those cases, the IRS issues a corrective action, which is more often than not a refund of executive contributions. Unfortunately, a failed test can trigger even more internal stress within a company.

Why compliance is a priority for all

ADP and ACP failures are more than a technical issue. They often create ripple effects across leadership and HR teams, such as:

Executive frustration and disrupted planning: Leaders typically defer aggressively to reduce taxes and accelerate retirement savings. When those contributions must be refunded, it disrupts carefully planned financial strategies and can reduce confidence in the company’s benefits structure.

Administrative headaches and unexpected costs: Compliance errors require corrections, reporting, and coordination with payroll and plan providers, which is often a major task for HR and finance professionals.

Strain between leadership and HR: Because testing outcomes depend heavily on workforce participation, HR teams often face pressure from executives to “fix” a plan after failures occur. By that point, corrective options are limited, usually involving a sacrifice by the executives themselves.

In short, compliance failures can undermine one of the plan’s primary purposes: helping leadership and employees build retirement security, while enhancing their confidence and trust in their employer.

Design a better, more compliant plan

Failing an ADP or ACP test is rarely the product of malintent on the part of an employee. The root cause is usually a flawed retirement plan design.

Many companies unintentionally create compliance risk through structural decisions, such as limiting eligibility to certain levels of workers or requiring employees to actively opt in. Plans don’t need to comply only with eligibility rules; they must also garner sufficient participation to support executive contribution goals.

This dynamic creates a direct link between employee engagement and executive savings capacity. Here are some proven strategies to boost compliance through smart design:

1. Expand eligibility

Plans that allow broad and early access tend to perform better in nondiscrimination testing. Restrictive eligibility rules or excluded employee groups can increase the likelihood of failing coverage and deferral tests.

2. Automatic enrollment

Automatic enrollment is one of the most effective tools for increasing participation, particularly among employees who might not otherwise enroll on their own. This approach removes inertia as a barrier and aligns employee behavior with plan success.

3. Safe harbor and structured matching

Safe harbor designs can automatically satisfy ADP/ACP requirements, assuming that certain employer contribution rules are met. This structure gives executives greater certainty that they’ll be able to contribute the maximum amount allowed each year — without worrying about refunds.

4. Proper payroll integration

Payroll errors alone can jeopardize plan compliance and require costly corrections. Reduce operational complexity by combining multiple payroll systems and manual processes. Then, simplify compensation definitions and eligibility rules to lower compliance risk.

Companies often view nondiscrimination testing failures as an unavoidable part of offering a retirement plan. In reality, most failures stem from structural choices that can be addressed proactively. When plans are designed to encourage broad participation, they not only pass compliance tests more consistently, but they also allow executives to maximize their retirement savings without disruption.