All 401(k) plans that are not “safe harbor” for the 2015 plan year must have ADP/ACP testing completed soon.
What is an Actual Deferral Percentage / Actual Contribution Percentage (ADP/ACP) Test?
Annual non-discrimination tests for 401(k) plans are mandated by the IRS to ensure that a plan does not unduly benefit owners and highly compensated employees at the expense of other employees. The ADP/ACP tests are two of the tests that must be passed in order to satisfy the non-discrimination requirements and keep your plan in compliance with IRS regulations.
How to Correct a Failed ADP/ACP Test
- A 401(k) plan that fails either of the ADP/ACP tests can correct the failure by distributing the excess elective deferrals or matching contributions allocated to the Highly Compensated Employees (HCE), adjusted for allocable gains or losses, from the plan.
- All excess contributions must be distributed to the appropriate HCE after the close of the plan year in which the excess contribution occurred, but no later than 12 months after the close of that plan year.
- The plan sponsor must pay a 10% excise tax if the corrective distribution is made more than 2½ months after the end of the plan year, which is March 15, for all calendar year plans.
How to Avoid Penalties and Meet the March 15, 2016 Deadline
If you have not already done so, please provide your plan’s 2015 census information to your Employee Benefit Administrator as soon as possible. This will ensure your ADP/ACP tests can be completed and any testing failures returned and corrected by the March 15, 2016 deadline to avoid penalties.
If you have any questions or would like more information, please contact one of our Employee Benefit Administrators.
