Certified Plan Sponsor Professional (CPSP) Practice Exam

When must a plan sponsor correct failures of the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests?

1. Within 3 months of the failure

2. End of the plan year following the year in which the failures occur

3. At the beginning of the next plan year

4. Within 6 months of the plan year end

The correct answer is: End of the plan year following the year in which the failures occur

The requirement for a plan sponsor to correct failures of the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests is indeed to do so by the end of the plan year following the year in which the failures occur. This timeline is stipulated in the IRS regulations concerning qualified retirement plans that are subject to these tests. This means that if deficiencies are identified in a given plan year, the sponsor has until the conclusion of the subsequent plan year to rectify those issues. This gives the plan sponsors sufficient time to assess the contributions, determine any required corrective measures, and implement those changes effectively, maintaining compliance with federal regulations and ensuring that the plan can continue to function as intended. The correction process often involves making adjustments such as refunding excess contributions to highly compensated employees or increasing contributions for non-highly compensated employees to ensure that the plan meets the required standards. Understanding this timeline is crucial for plan sponsors to avoid penalties and ensure that their retirement plans remain attractive and compliant for all participants.