Plan Sponsor Quick Tips: Correcting failed ADP/ACP Nondiscrimination Tests

Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.

To ensure that your plan is within IRS limits your service provider will conduct tests on the deferral (ADP) and match (ACP) relationships between highly compensated employees and non-highly compensated employees. Should your plan fail any of these two tests then you have the options of correcting them per below:

  • Distribution or forfeit the excess amounts.  The distributions are treated as taxable income to the participant for the calendar year in which the distribution is made.
  • Make a 100%-vested employer contribution per the rules of your plan document.

A 10% excise tax is imposed on the plan sponsor for corrective distributions processed after the 15th day of the third month following the plan year-end. Please see your tax advisor if you find yourself in this situation. As always, there are many facets of the ADP/ACP tests that you should be aware of each year and your service provider is the best place to get the information from.

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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