As we kickoff the New Year, Plan Sponsors should be aware of the important Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) testing deadline, which is approaching fast for the calendar year-end Plans.

ADP and ACP tests are annual required tests for most defined contribution plans, limiting the ratio of benefits that highly compensated employees are allowed to receive in relation to non-highly compensated employees. Not all plans are subject to ADP/ACP testing, such as safe-harbor plans.

When a Plan fails ADP or ACP testing, Plan Sponsors can either make an additional employer contribution on behalf of the non-highly compensated employees, which can be expensive, or they can refund the excess contributions back to the highly compensated employees, which is the more common correction method.

The deadline to make corrections for failed ADP/ACP testing is 2 ½ months after the Plan’s year end. Below is a summary of calendar year-end plans:

  • March 15, 2022 – Deadline to pay refunds for ADP/ACP tests and avoid additional 10% excise tax
  • December 31, 2022 – Absolute deadline to pay refunds for ADP/ACP test (however 10% excise tax will be incurred, and Form 5530 required)  

So what should you do now?  Plan Sponsors should send their accurate census data to their Third Party Administrator (“TPA”) and ensure that the TPA is completing the ADP/ACP testing in accordance with their Plan’s testing deadlines. In addition, Plan Sponsors should ensure that any refunds, if required, are distributed to participants by March 15, 2022. This will ensure plans avoid the 10% excise tax and that the plans stay in compliance will IRS Compliance testing regulations. 

About the Author

Joe Zapf, CPA, is a Senior Manager in the SobelCo Assurance Practice. He works in the firm’s Financial Services, Commercial, and Employee Benefit Plans practice areas. This three-prong approach increases Joe’s ability to add value to a wide range of clients across several vertical markets while also providing him with a diverse and interesting client base.