March 15 is a well-known date in the defined contribution world. This is the ADP/ACP testing deadline; meaning this is the date that corrective distributions must be processed for a failed ADP/ACP test (Actual Deferral Percentage/Actual Contribution Percentage test, respectively) for a calendar plan year (01/01-12/31).
What can you do to prepare?
Make sure you have submitted accurate data to your TPA to complete the testing. Incorrect or missing data can prolong the process and require costly and time-consuming corrections. This is important to remember when you are sending the year-end data to your TPA and when you’re administering the plan throughout the year. Plan errors (in reporting or in practice during the year) can result in penalty and interest costs. You will also incur additional administrative charges from your TPA to correct the mid-year plan errors or any testing completed using incorrect data.
What happens if your test fails?
You have 2.5 months after the end of the plan year to correct the excess contributions. “If the employer doesn’t distribute/recharacterize excess contributions by 2 ½ months (six months for certain EACAs) after the plan year of excess, the employer is liable for a 10 percent excise tax on excess contributions.” (IRS, 401(k) Plan Fix-It Guide)
Should you panic if your testing fails? No. Sit back, take a deep breath and read our blog, What A Failed ADP/ACP Test Means. You may be surprised to find out that a failed test isn’t necessarily a bad thing because it indicates your highly compensated employees deferred the maximum amount allowed by law.
The 2020 corrective distributions are due on March 16, 2020. To stay up-to-date on the plan deadlines for your defined contribution plan, download our 2020 Defined Contribution Compliance Calendar.