How is a failed adp test corrected
Average Deferral Percentage (ADP) test explained by Professional Benefit Services
hello and welcome to today's video
explaining the actual deferral
percentage or ADP test if you have ever
had any money returned to you after your
end or were limited as to what you could
defer then you know the effects of
failing this test let's run through an
example of how this test is performed in
this test we measure the ratio of
deferrals as a percentage of pay between
the highly compensated employees or hces
and the non highly compensated employees
referred to as n hces
and hce is defined as one a more than 5%
owner to a family member of a 5% owner
subject to family attribution rules or
three an employee who earns over the
compensation threshold in the prior year
or is in the top 20 percent paid group
everybody else that has satisfied the
agent service requirements would be
considered an NH c e here you can see
that we have segregated the employees
into those that are hces and those that
are NHC es we then take their to fro
mount and divide it by their annual
compensation and get a percentage
deferred when this is average for the
hce group we get an average deferral
percentage in this case it's 5% then we
go through the same calculations with
the NHC es take their deferral amounts
and divide by their compensation and
with this group we come up with an
average deferral rate of 3.75 percent
the test then says that if the NHC
average defer rate is between 0 and 2%
the AC can defer twice that rate on
average if it is between 2 and 8 percent
DHC can defer 2% more on average and if
it is greater than 8% the HC can defer
one point to five times the NHC e rate
on average in this case the NHC average
deferral rate is 3.75 percent so
following the formula we would add 2
percent to the 3.75 percent to come up
with five point seven five percent this
hce group passes the test because the 5
percent average deferral rate is less
than the five point seven five deferral
rate maximum
loud the correction of any failure is to
have money come back as taxable income
to the hces
in that tax year and as long as that
happens within two and a half months
after the plan year ends there will not
be any additional penalties our hope
with this video is that you have a
clearer understanding of your plan and
potential testing issues that you may be
facing this information is for reference
only there can be many variations to
this test so please contact our office
to review your specific plan
