Summary
This guide outlines strategies for plan sponsors to address failures in Actual Deferral Percentage (ADP) testing for 401(k) plans. It begins by explaining the significance of ADP testing, which ensures that plans do not favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). The document discusses common reasons for testing failures, such as insufficient deferral rates among NHCEs and participation issues. It emphasizes the importance of reviewing compliance testing data and considering adjustments to HCE definitions and eligibility provisions. The guide also suggests refreshing communication strategies to enhance employee participation and deferral rates. Additionally, it presents options like implementing automatic enrollment features and considering safe harbor plan designs, which can alleviate the need for ADP testing. Finally, it discusses potential actions for plan sponsors to mitigate ADP issues, including issuing refunds to HCEs and making qualified contributions to NHCEs. Overall, the document provides a comprehensive approach to improving ADP testing outcomes.
