Each year you receive a “pass” or “fail” from your service provider regarding required non-discrimination testing (the Actual Deferral Percentage test and the Actual Contribution Percentage test).
The ADP/ACP tests govern the amounts of deferrals and/or matching contributions that highly compensated employees (HCEs) are allowed to make or receive in relation to those of non-highly compensated employees (NHCEs).
If you received a “fail” do not panic. As long as an IRS-prescribed corrective action is undertaken, the plan’s health is not in jeopardy. Correction can be made by either:
- Refunds of excess contributions (plus earnings thereon) to HCEs
- By employer qualified non-elective contributions (QNECs) or qualified matching contributions (QMACs) to NHCEs under the plan, or
- By recharacterizing excess contributions. The most common corrective method is the refund of excess contributions to HCEs following IRS procedures.
401(k) Advisors (c) 2012. All rights reserved. 401k-2014-86
