If neither is done by the end of the following plan year, then the testing failure becomes a plan failure and must be corrected under the IRS correction programs outlined in Revenue Procedure 2019-19.Ī new option made available with the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act is to make the plan a safe harbor plan. Otherwise, the excess can still be distributed, but penalties may apply.

If you fail to distribute, or return, the excess amounts within the applicable time frame, a qualified nonelective contribution (QNEC) can be made to achieve an ADP ratio that passes testing if the plan uses the current-year testing method for its ADP test. If the plan has an eligible automatic contribution arrangement, the excess amounts can be returned within six months after the end of the plan year. First, you can distribute, or return, the excess amounts-adjusted for earnings-to the plan participant within two and a half months after the end of plan year. Is there anything else that can be done?Īs you have noted, there is a path to correcting an actual deferral percentage (ADP) testing failure. I know there are distribution methods, or possible contribution methods, that can be used to correct an ADP failure.

By Ethan Branum, CIP We have a retirement plan that has failed its ADP test.

Safe harbor contribution