In which case would an employer be liable for non-compliance with the ADP/ACP testing?

An employer becomes liable for non-compliance with the ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) testing primarily when they fail to correct the test results. These tests are designed to ensure that contributions to 401(k) plans do not disproportionately favor highly compensated employees over lower-paid employees.

If the testing results indicate that contributions are not compliant, it is the employer's responsibility to take action to correct these results. Failure to make necessary corrections can lead to penalties and liabilities, as the plan could be deemed non-compliant with IRS regulations. This may involve taking steps such as refunding excess contributions to highly compensated employees or making corrective allocations.

While factors like the percentage of employees who contribute or using different testing methods might influence testing outcomes or methods, they do not directly impose liability on the employer for non-compliance. Similarly, improper funding of the plan relates to other regulatory concerns but does not specifically pertain to the ADP/ACP testing compliance standards. Therefore, the most relevant situation for employer liability in this context is the failure to address and rectify non-compliant test results.