True or false: If elective deferrals are recharacterized to after-tax contributions, those contributions are excluded from ACP testing.

The statement is false because elective deferrals, when recharacterized to after-tax contributions, are not automatically excluded from Actual Contribution Percentage (ACP) testing. The ACP test is designed to ensure that the contributions made by highly compensated employees do not disproportionately exceed those made by non-highly compensated employees, with the aim of preventing discrimination in favor of higher earners.

When deferrals are recharacterized as after-tax contributions, they still count as a contribution to the plan and can influence the ratios used in ACP testing. This means that both the original elective deferrals and the recharacterized after-tax contributions may be included when calculating the contributions that are subject to ACP testing. Therefore, the understanding of how recharacterizations impact testing is critical for maintaining compliance with IRS regulations.