ADP/ACP testing

United States

#1 Oct 27, 2011
In early October 2011 I received a large refund of my 401(k) contributions. I was told by my company’s benefits department that this refund came from my contributions for 2010 because of a failure of the ADP/ACP tests. I was also told I received the refund this year (2011) because I was considered a highly compensated employee (HCE) for 2010.

In 2009, my compensation was greater than the 2009 compensation limit ($110,000). In 2010, my compensation was less than the 2010 compensation limit ($110,000).

My benefits department has not been able to clearly explain to me why I was considered an HCE for 2010 when my compensation that year was less than $110,000.

Can someone help me understand the IRS rules regarding when an employee is considered an HCE for the purpose of ADP/ACP testing? It seems to have worked like this: 2009 – compensation exceeded limit; 2010 – considered an HCE for 2010 because 2009 compensation exceeded limit; ADP/ACP testing for 2010 failed, which means I received a large refund of my 2010 contributions even though my 2010 compensation was less than the limit (and therefore not an HCE).

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