IRS Publication 7334 – IRS Forms, Instructions, Pubs 2026 – In the world of retirement planning, ensuring compliance with IRS regulations is crucial for employers offering employee benefit plans. IRS Publication 7334, titled “Employee Benefit Plans Explanation No. 11: Employee and Matching Contributions,” serves as a key resource for navigating the nondiscrimination requirements under Section 401(m) of the Internal Revenue Code. This guide focuses on plans that include employee contributions and employer matching contributions, often referred to as 401(m) plans. Whether you’re an employer setting up a 401(k) plan or a plan administrator ensuring ongoing compliance, this publication outlines essential rules to avoid qualification issues.
Published in June 2021 and still relevant as of 2026 with no major revisions noted, Publication 7334 includes tools like Worksheet 11 (Form 8799) and Deficiency Checksheet 11 (Form 9416) to help identify and correct potential problems. It emphasizes the actual contribution percentage (ACP) test, correction methods for excess contributions, and safe harbor options to simplify compliance.
What Is Section 401(m) and Why Does It Matter?
Section 401(m) applies to defined contribution plans that allow after-tax employee contributions or employer matching contributions. These rules ensure that highly compensated employees (HCEs) do not disproportionately benefit compared to non-highly compensated employees (NHCEs). Failing to meet these nondiscrimination standards can disqualify the entire plan, leading to tax penalties and required corrections.
The publication clarifies that Section 401(m) testing is separate from the actual deferral percentage (ADP) test for elective deferrals under Section 401(k), though they often overlap in 401(k) plans with matching features. For instance, recharacterized excess elective contributions are treated as employee contributions subject to ACP testing.
Key applicability notes:
- Defined Contribution Plans: Includes after-tax contributions allocated to individual accounts, but excludes Roth contributions, loan repayments, rollovers, and certain other items.
- Matching Contributions: Employer contributions based on employee contributions or elective deferrals, including forfeitures allocated on that basis.
- Exclusions: Defined benefit plans generally don’t apply unless they have separate accounts for voluntary contributions.
Employers must review their plans against these criteria to determine if Worksheet 11 is needed.
The Actual Contribution Percentage (ACP) Test Explained
At the heart of Publication 7334 is the ACP test, which compares the average contribution percentages of HCEs and NHCEs to prevent discrimination. The test uses actual contribution ratios (ACRs), calculated as employee plus matching contributions divided by compensation.
How the ACP Test Works
- Prior-Year vs. Current-Year Testing: Most plans use prior-year NHCE data for comparison. The HCE ACP cannot exceed the greater of 1.25 times the prior-year NHCE ACP or the lesser of 2 times the NHCE ACP or the NHCE ACP plus 2%.
- Eligible Employees: Includes all who could make contributions, even if they choose not to or are suspended due to hardships or loans.
- Contributions Included: Employee contributions paid during the plan year; matching contributions allocated in the year and paid within 12 months after.
- Aggregation Rules: Plans aggregated for other qualification tests are treated as one for ACP purposes.
For new plans, NHCEs can be deemed at 3% in the first year. Governmental and collectively bargained plans are automatically deemed to pass.
Example of ACP Calculation
Suppose the prior-year NHCE ACP is 2.50%, and the HCE ACP is 4.37%.
- Test 1: 2.50% × 1.25 = 3.13% (fails since 4.37% > 3.13%).
- Test 2: Lesser of 2.50% × 2 = 5.00% or 2.50% + 2% = 4.50%. Passes since 4.37% < 4.50%.
If the test fails, corrections are required to maintain plan qualification.
Correcting Failures: Excess Aggregate Contributions
Publication 7334 details exclusive methods for correcting ACP failures: additional qualified nonelective contributions (QNECs) or qualified matching contributions (QMACs) for current-year testing plans, or distribution/forfeiture of excess aggregate contributions (EACs).
- Additional Contributions: Must be fully vested and distribution-restricted like elective deferrals.
- EAC Distribution/Forfeiture: Use ratio leveling (reduce highest ACRs) followed by dollar leveling (distribute from highest contributors). Include allocable income, and complete by the end of the 12th month after the plan year to avoid a 10% excise tax.
Forfeited matches related to excess deferrals aren’t counted in the ACP test. Timely corrections are essential to avoid further penalties.
Defining Highly Compensated Employees and Compensation
Accurate definitions are critical for testing.
- HCE Definition: A 5% owner in the current or prior year, or someone with prior-year compensation over $80,000 (adjusted; for 2026 look-back, it’s higher based on inflation—e.g., the 2025 limit was part of broader adjustments). Top-paid group election (top 20%) can apply.
- Compensation: Generally under Section 415(c)(3), capped at $200,000 (adjusted; for 2026, the defined contribution limit is $72,000, reflecting ongoing inflation adjustments). Safe harbor definitions exclude certain fringes.
These definitions aggregate across related employers and must be consistent.
Safe Harbor Provisions for Easier Compliance
To avoid the ACP test, plans can adopt safe harbor designs under Sections 401(m)(11) or 401(m)(12) for qualified automatic contribution arrangements (QACAs).
Traditional Safe Harbor (Section 401(m)(11))
- Matching Formulas: Basic (100% on first 3%, 50% on next 2%) or enhanced (at least 100% on first 4%).
- Limits: No matches on contributions over 6% of compensation; rates can’t increase with contribution levels; HCE rates ≤ NHCE rates.
- Discretionary Matches: Capped at 4% of compensation; otherwise, regular ACP applies.
- Vesting: Immediate for safe harbor matches.
QACA Safe Harbor (Section 401(m)(12))
- Lower matching (up to 3.5%); allows 2-year vesting cliff.
- No post-hardship contribution suspensions after 2019.
Safe harbors require annual notices and limit mid-year changes, except for specific updates like those related to legal rulings. Aggregation rules apply, and after-tax contributions trigger regular testing.
| Safe Harbor Type | Matching Cap | Vesting | Discretionary Limit |
|---|---|---|---|
| Traditional | 6% of compensation | Immediate | 4% |
| QACA | 6% of compensation | Up to 2-year cliff | 4% |
Current Updates and Considerations for 2026
While Publication 7334 dates to 2021, IRS adjustments for 2026 include increased limits that impact related plan features. For example, the 401(k) elective deferral limit rises to $24,500, catch-up contributions to $8,000 (or $11,250 for ages 60-63), and the defined benefit limit to $290,000. HCE thresholds and compensation caps also adjust annually—consult IRS Notice 2025-67 for details.
Employers should review plans against these updates to ensure matching formulas and contribution caps align with current law. No direct revisions to Publication 7334 were announced for 2026, but integrating these limits maintains compliance.
Why Compliance with IRS Publication 7334 Is Essential?
Adhering to the guidelines in IRS Publication 7334 helps prevent costly errors in employee benefit plans. By understanding applicability, conducting proper ACP testing, and leveraging safe harbors, employers can offer competitive retirement benefits while avoiding IRS scrutiny. For personalized advice, consult a tax professional or visit IRS.gov for the latest forms and notices.
This resource remains a cornerstone for 401(m) plan management, promoting fair access to retirement savings across all employee levels.