Which method involves a two-step process to determine the amount distributed to each HCE who is an eligible employee during an ADP failure year?

The leveling method is a technique used to determine the amount distributed to each Highly Compensated Employee (HCE) during a year when there's an Actual Deferral Percentage (ADP) failure. This method consists of a two-step process. First, it necessitates determining the amount of excess contributions that must be refunded to the HCEs based on their contributions. Then, it allows for adjustments to ensure that the refunds appropriately address the issues stemming from the ADP test failure.

By ensuring that the amounts distributed are equitable and proportional to the HCEs' contributions while maintaining compliance with regulatory requirements, the leveling method enables employers to correct an ADP failure effectively. This method is particularly suitable in situations where clear and structured guidelines are needed to navigate compliance challenges.

In contrast, other methods such as the projection method, adjustment method, and standard method involve different processes or approaches that may not specifically align with the two-step distribution process defined by the leveling method for addressing an ADP failure. Each of these methods serves its own purpose in managing plan contributions and ensuring compliance, but they do not encapsulate the same two-phased strategy as the leveling method.