If a 401(k) plan fails ADP/ACP nondiscrimination testing, common corrective steps include:

If a 401(k) plan fails ADP/ACP nondiscrimination testing, common corrective steps include:

• A. Refund excess contributions, reallocate deferrals to non-highly compensated, or adopt a safe harbor plan to avoid penalties.
• B. Increase employer matching to all employees equally.
• C. Terminate the plan retroactively.
• D. Exclude highly compensated employees from future contributions.

Answer: (A)

Nondiscrimination testing for 401(k) plans looks at how much highly compensated employees defer and contribute compared with nonhighly compensated employees. When the plan fails the ADP/ACP tests, the standard corrective steps are to remove the imbalance by returning any excess deferrals, then reallocate those amounts to non-highly compensated employees, or to change the plan design to a safe harbor. Returning excess contributions and shifting deferrals toward NHCEs directly adjusts the percentages so the plan meets the nondiscrimination requirements, and adopting a safe harbor design guarantees future contributions that satisfy the tests automatically, avoiding penalties. The other options don’t fix the testing issue in the same way. Simply increasing employer matching across the board isn’t a recognized corrective step for an ADP/ACP failure unless it’s implemented as a safe harbor design, and even then it’s part of a design change rather than a post-failure correction. Terminating the plan retroactively isn’t a valid corrective action for nondiscrimination testing, and excluding highly compensated employees from future contributions would violate the nondiscrimination rules.

Nondiscrimination testing for 401(k) plans looks at how much highly compensated employees defer and contribute compared with nonhighly compensated employees. When the plan fails the ADP/ACP tests, the standard corrective steps are to remove the imbalance by returning any excess deferrals, then reallocate those amounts to non-highly compensated employees, or to change the plan design to a safe harbor. Returning excess contributions and shifting deferrals toward NHCEs directly adjusts the percentages so the plan meets the nondiscrimination requirements, and adopting a safe harbor design guarantees future contributions that satisfy the tests automatically, avoiding penalties.

The other options don’t fix the testing issue in the same way. Simply increasing employer matching across the board isn’t a recognized corrective step for an ADP/ACP failure unless it’s implemented as a safe harbor design, and even then it’s part of a design change rather than a post-failure correction. Terminating the plan retroactively isn’t a valid corrective action for nondiscrimination testing, and excluding highly compensated employees from future contributions would violate the nondiscrimination rules.