This week’s question comes from Dan, a business owner: I just found out that I had an ADP failure. What can I do to fix it? Answer: ADP failures are unfortunately too common, but Vision Payroll can easily help fix them. ADP, or Actual Deferral Percentage, and ACP, or Actual Contribution Percentage, are two tests that must be passed by many 401(k) retirement plans. These tests serve to limit the benefits provided to highly compensated employees (HCEs) in relation to the benefits provided to non-highly compensated employees (NHCEs).
In the ADP test, the average salary deferral of each group is calculated and compared to the other. The ADP of the HCEs may not exceed the ADP of the NHCEs by 1.25% or the lesser of the average NHCE percentage plus 2% or the average NHCE percentage times two. If it does, the plan has an ADP failure.
There are various methods for correcting an ADP failure depending on how quickly the failure is discovered. Unfortunately, many companies are unaware of the problems caused by ADP failures until it’s too late. Generally, if too much time has elapsed, fixing an ADP failure will become more expensive. Vision Payroll can work with your plan administrator to fix the ADP failure and provide solutions to make sure there are no ADP failures in your future.