These contributions are generally made by payroll deductions. The amount that highly compensated employees can contribute is further limited by the amounts contributed by the nonhighly compensated employees. IRS regulations require the use of nondiscrimination tests to determine the maximum contribution levels for highly compensated employees. No employer contributions are required. Employee participation is optional.
Employees are able to reduce their taxable income and save for retirement.
Possible Disadvantages Plans must satisfy nondiscrimination testing. If these tests are not passed, corrective action must be taken. Administration and testing can be more complicated than for other kinds of plans.