What is the correct corrective action period if a plan fails the ADP test?

When a plan fails the Actual Deferral Percentage (ADP) test, the Internal Revenue Service (IRS) allows for a corrective action period to remedy the failure. The correct period for making these corrections is up to 12 months following the end of the plan year in which the failure occurred.

This timeframe allows plan sponsors adequate time to either adjust contributions, issue refunds to highly compensated employees, or take other corrective measures to ensure that the plan adheres to IRS regulations regarding average deferral ratios. By adhering to this 12-month corrective action period, plan sponsors can maintain compliance and avoid potential penalties or adverse tax consequences for both the plan and its participants.