After a distribution, if the deferral percentages of HCEs are recalculated, what is likely to be the outcome for the ADP test?

The outcome of the ADP (Actual Deferral Percentage) test after recalculating the deferral percentages for Highly Compensated Employees (HCEs) can be uncertain, which is why it is likely that the test may still not pass. The ADP test is designed to ensure that the contributions of HCEs do not disproportionately exceed those of Non-Highly Compensated Employees (NHCEs) in a 401(k) plan.

Even when recalculating the deferral percentages, if the changes do not result in a significant enough adjustment that balances the contributions of HCEs with those of NHCEs, the plan may still fail the test. The recalculated percentages need to be within acceptable limits defined by IRS regulations for the plan to pass this test. Simply adjusting the deferral percentages without addressing the fundamental issues will not guarantee compliance.

Because the outcome relies on various factors such as the number of HCEs vs. NHCEs, their contributions, and the overall design of the plan, the possibility exists that the recalculation will not lead to compliance, making it a realistic conclusion to state that it may still not pass.