What happens if a 401(k) plan fails its ADP and/or ACP test?
The most common corrections are: (i) a return of excess contributions plus interest to certain “Highly Compensated Employees”; or (ii) a “Qualified Non Elective Contribution” is allocated to Non-Highly Compensated Employees. The return of excess amounts must be done within 2½ months of the close of the plan year to avoid an IRS excise tax of 10%. If the return is made within 2½ months following the end of the plan year, it is taxable to the participant in the calendar year in which the first day of the plan year begins. If the return is made after 2½ months following the close of the plan year, it is taxable to the participant in the calendar year in which the distribution is received.
