Is a participant who made excess deferrals part of the NHCE calculation in regard to ADR?

To understand why the correct answer is affirmative, it’s essential to recognize how excess deferrals influence the Non-Highly Compensated Employee (NHCE) calculation concerning Average Deferral Ratios (ADR).

In a 401(k) plan, the distinction between Highly Compensated Employees (HCEs) and NHCEs plays a crucial role in assessing compliance with nondiscrimination requirements. When calculating the ADR, which is a measure used to ensure that the contributions of HCEs do not disproportionately exceed those of NHCEs, all participants who make elective deferrals are considered, including those who might have exceeded the contribution limit.

Excess deferrals are contributions that exceed the annual limit set for 401(k) contributions. These excess deferrals are relevant because they can impact the overall contributions and ratios used in calculating the plan's compliance with nondiscrimination tests, including the ADR test. By incorporating all participants who made the deferrals into the NHCE calculation, the plan administrators can more accurately reflect the contribution patterns within the workforce and ensure that the plan maintains its qualified status under IRS guidelines.

The explanation of this includes recognizing that all participants making deferral contributions, not just those under the limit, must be part of the NHCE