Corrective Actions For ADP/ACP Test Fail Flashcards
What happens when the plan fails the ADP test?
The employer can take corrective actions, which may affect HCEs or NHCEs
HCEs are Highly Compensated Employees, and NHCEs are Non-Highly Compensated Employees.
What is one corrective action for failing the ADP test?
Return salary deferrals to HCEs in an amount sufficient to pass the test
When must distributions occur after failing the ADP test?
Within 12 months following the end of the tested plan year
What must HCEs forfeit when salary deferrals are returned?
Associated matching contributions
How are excess contributions calculated for the ADP test?
Using total deferrals, including Roth
What is the tax implication of the amount distributed to HCEs?
The amount distributed, including earnings, is taxable in the year distributed
What must distributions include when correcting the ADP test?
Earnings through the end of the plan year being tested
What excise tax does the employer pay if corrections are made late?
10% excise tax if corrections are made more than 2½ months after the end of the tested plan year
What is one way to correct the ADP test by recharacterization?
Recharacterize HCE elective contributions as after-tax contributions
What is a Qualified Nonelective Employer Contribution (QNEC)?
An employer contribution intended to replace the lost opportunity for NHCEs to make elective deferrals
What are the vesting requirements for a QNEC?
The QNEC must be 100% vested
What is the purpose of the ACP test?
To ensure that employer matching contributions do not disproportionately favor HCEs
What corrective action is taken for excess employer HCE matching contributions?
Remove excess contributions and earnings from HCE accounts
What must be distributed from HCE accounts under the ACP test?
After-tax contributions and the vested portion of employer contributions
What is the consequence for unvested portions of employer contributions under the ACP test?
They must be forfeited
