When must a plan sponsor correct failures in Actual Deferral Percentage (ADP) testing?

The correct answer highlights that a plan sponsor must correct failures in Actual Deferral Percentage (ADP) testing by the last day of the plan year following the year the failure occurs. This timeframe is essential because it allows plan sponsors to address compliance issues in a timely manner while minimizing potential penalties and ensuring that the plan continues to meet the necessary regulatory requirements.

The ADP test is a critical aspect of maintaining a qualified retirement plan, as it ensures that employee contributions do not disproportionately favor highly compensated employees over non-highly compensated employees. By resolving testing failures within the stipulated timeframe, plan sponsors can take corrective actions such as refunds or plan amendments to bring the plan back into compliance.

Understanding the importance of this timeline can help plan sponsors avoid the consequences of non-compliance, which may include additional taxation or disqualification of the plan. The other options do not align with the regulatory requirements for ADP testing corrections, as they either suggest a shorter or arbitrary timeframe that would not meet the established standards necessary to rectify the issue appropriately.