True or false: A failure to correct an ADP violation timely results in the taxation of employees' elective contributions, but a failure to correct the ACP test timely results in disqualification of the entire plan.

The statement is true. If a plan has failed the Actual Deferral Percentage (ADP) test and this violation is not corrected timely, the result is that affected employees’ elective contributions become subject to immediate taxation. This means that the contributions they made to the plan will be taxed as income in the year the correction was due, which can create a financial burden for employees who might have anticipated tax-deferred growth.

On the other hand, a failure to correct the Actual Contribution Percentage (ACP) test in a timely manner does indeed lead to the disqualification of the entire 401(k) plan. If the plan becomes disqualified, it can have significant tax implications, not just for high-paid employees but for all participants, potentially exposing them to unwanted tax liabilities.

This distinction highlights the critical nature of compliance with both tests under the 401(k) regulations. The ADP corrective actions can often be managed with distributions or refunds to affected employees, while the ACP failure carries a more severe consequence, impacting the plan's entire operational validity. Thus, the classification as true reflects an accurate understanding of the differing outcomes of these two compliance tests.