My plan failed the ADP compliance test. How and when are corrections made?

If your plan fails the Actual Deferral Percentage (ADP) compliance test, there are typically two corrective action options available for your company to choose from. The specific approach and timing for making these corrections can vary depending on your plan's terms and the guidelines set by the IRS.

Option #1: Refunding excess contributions to Highly Compensated Employees (HCEs): One option is to refund the excess contributions made by Highly Compensated Employees. This means that the amount that exceeds the allowable limit for HCEs would be returned to them. By doing so, the plan aims to bring the ADP ratios back into compliance.

Option #2: Funding employer contributions to Non-Highly Compensated Employees (NHCEs): Alternatively, your company can choose to make additional contributions on behalf of Non-Highly Compensated Employees. This involves providing extra employer contributions to NHCEs in order to increase their overall participation and potentially balance out the ADP ratios.