ADP and ACP Test Results May Be Affected
Many employers have had to lay off or furlough employees, reduce salaries, or suspend employer matches and make other changes in their Define Contribution (DC) plans due to the coronavirus-related economic fallout. At the same time, employees may have made changes to their deferral rates and participation in retirement plans. These actions could potentially cause a plan to fail the annual Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) nondiscrimination testing required for non-safe harbor DC plans. Employers should anticipate the potentially adverse effects of these changes prior to year-end testing.
What You Should Know
- Plan sponsors should review their plans with compliance and testing specialists now and identify steps that could be taken to reduce the risk of 2020 year-end testing failures.
- Sample testing prior to the end of the plan year may be helpful in identifying potential shortfalls.
- If either the ADP or ACP test is failed, a plan sponsor must make a correction by refunding amounts to highly compensated employees (HCEs) and/or providing additional company contributions to non-highly compensated employees (NHCEs).
- Plans have 2 1/2 months after the end of a plan year to make corrections required for ADP/ACP test failures.
- A plan continues to be in good standing with the IRS and DOL as long as corrections are made in a timely fashion.
- To avoid a failed test, plan sponsors may consider taking actions that include:
- Automatically enrolling furloughed employees upon their return to work.
- Increasing communications and financial education programs targeted at increasing NHCE contributions.
- Limiting the amount HCEs can contribute for the remainder of the year.
- Employers may decide to refrain from changing practices now and make corrections as needed following year-end testing. If so, they may want to communicate to HCEs about the possibility of refunds from the plan in the event of a testing failure.