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Posted

If a plan fails an ADP test what are the corrective actions that can take place?

1. I am seeing a lot of answer that state that you have two options if you complete this prior to March 15th (2 1/2 months) of the following year.  1 - you can distribute excess contributions to HCES, or 2 - you can provide a QNEC to NHCES in the amount necessary to raise the ADP to the percentage necessary to pass the test. 

2. Then I am seeing other answers that state if you want to distribute excess contributions you must use the one to one method where you must distribute excess contributions to HCE's and then also contribute a QNEC of that same amount to NHCE's. 

Does the second option only apply if you did not complete either the distribution of excess contributions to HCE's or provide QNEC's to NHCE's prior to March 15th of the following year, or is that paticular corrective action always going to need to include the QNEC in the same amount if you choose to use the distribution of excess contributions method? 

Posted

I have been away from this sort of admin for years but my recollection is (1) you can refund excess by 3/15 (avoid excise tax), (2) refund after 3/15 but before 12/31 (incur excise tax), (3) provide QNEC to pass test if current year testing, deposit by 12/31, or (4) if you do not correct by the end of the following year then a permissible EPCRS self-correction method is what you describe in (2).

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests

 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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