If you have received a corrective distribution from your employer, it was likely triggered by a test result that required action to keep your employer’s retirement plan compliant. Please review the information in this article for common reasons for a corrective distribution and other answers to frequently asked questions.
ADP and ACP Testing
ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) tests are compliance tests required for retirement plans. They confirm the fairness of contributions by comparing the contribution rates of highly compensated employees (HCEs) to non-highly compensated employees (NHCEs).
What Are Highly Compensated Employees (HCEs) vs. Non-Highly Compensated Employees (NHCEs)?
- HCEs (Highly Compensated Employees): These are employees who earn above a certain threshold, often based on the previous year’s compensation. Typically, these are individuals in higher income brackets.
- NHCEs (Non-Highly Compensated Employees): These employees earn less than the HCE threshold and are often the majority of participants in the plan.
If the test finds that the contributions of HCEs are disproportionately higher than those of NHCEs, the plan may be considered out of compliance, and corrective action will be required. In this case, your employer may issue a corrective distribution to refund contributions and bring the plan back into compliance.
Note: The IRS requires the corrective ADP refund distributions to be included as taxable income in the year the check is received.
402(g)/415(c) Limits
In addition to ADP testing, your employer’s plan must also comply with the contribution limits set by the IRS, known as the 402(g) limit and 415(c) limit. If your contributions exceed these limits, a corrective distribution may be necessary.
What Are the 402(g) and the 415(c) Limits?
402(g) Limits
The 402(g) limit refers to the limit on elective deferrals.
2025 Limits
- Employee contribution limit: $23,500
- Catch-up contribution limit (for those age 50+): $7,500, for a total limit of $31,000 for employee contributions
- Additional catch-up contributions (for those age 60-63): $11,250, for a total limit of $34,750 for employee contributions
2024 Limits
- Employee contribution limit: $23,000
- Catch-up contribution limit (for those age 50+): $7,500, for a total limit of $30,500 for employee contributions
415(c) Limits
The 402(g) limit refers to the overall limit on contributions to a retirement plan.
2025 Limits
- Employee + employer contribution limit: $70,000
- Limit including catch-up contributions (for those age 50+): $7,500, for a total limit of $77,500
- Limit including additional catch-up contributions (for those age 60-63): $11,250, for a total limit of $81,250
2024 Limits
- Employee + employer contribution limit: $69,000
- Limit including catch-up contributions (for those age 50+): $76,500
What Happens if I Exceed the 402(g) Limit for the Plan Year?
If you exceed the 402(g) deferral limit for the plan year, your employer will distribute the excess deferrals by April 15 of the following year. Excess deferrals for the previous year that are withdrawn by April 15 of the following year are included in your gross income for the plan year. Earnings on the excess deferrals are taxed in the year they are distributed. The distribution is not subject to the additional 10% tax on early distributions.
What Happens if My Employer Exceeds the 415(c) Limit for the Plan Year?
Your employer will distribute the excess to you, which you will then have to include as income. However, you will not have to pay the additional 10% tax on the early distribution.
What Should I Do if I Believe I Exceeded the Limit(s)?
You may reach out to help@vestwell.com if you believe you have exceeded the annual contribution limit. Alternatively, you can allow this to be corrected automatically during the year-end testing process.