Does the calendar year data election apply only to the compensation test and not the 5% owner test?

The assertion that the calendar year data election applies only to the compensation test and not the 5% owner test is accurate. In the context of 401(k) plans, the compensation test measures whether contributions made to the plan do not exceed a certain percentage of the eligible employees' salaries, ensuring compliance with nondiscrimination requirements.

The calendar year data election allows plan sponsors to choose data from the calendar year instead of the plan year for evaluating the compensation test. This is beneficial for accurately assessing compliance based on the most recent annual compensation figures.

Conversely, the 5% owner test assesses whether any plan contributions favor highly compensated employees or owners. The 5% owner test does not have the same flexibility regarding election data periods as the compensation test. Therefore, while plan sponsors can make calendar year elections for the compensation test, this does not extend to the 5% owner test, which must adhere to different evaluation criteria.

Understanding this distinction is crucial for effective plan administration and compliance with IRS regulations. It highlights the specific parameters of each test and the rationale behind the application of data periods.