XI. Actual Deferral Percentage test

67 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

Statement of Requirement: Code §§ 401(a)(4) and 401(k)(3); Reg. § 1.401(k)-2; Rev. Proc. ~~2017-412~~ 023-37, sec. ~~6.03(12)1~~ 0.02(2)(j)

(Note to reviewer: Elective Deferrals must meet the nondiscrimination requirements of Code §§ 401(a)(4) and 401(k)(3). The following provisions must be included in the plan and cannot be incorporated by reference.)

Sample Plan Language:

Prior Year Testing The Actual Deferral Percentage ("ADP") for a Plan Year for participants who are Highly Compensated Employees for each Plan Year and the prior year's ADP for participants who were Non-highly Compensated Employees for the prior Plan Year must satisfy one of the following tests:

The ADP for a Plan Year for participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior year's ADP for participants who were Nonhighly Compensated Employees for the prior Plan Year multiplied by 1.25; or
The ADP for a Plan Year for participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior year's ADP for participants who were Nonhighly Compensated Employees for the prior Plan Year multiplied by 2.0, provided that the ADP for participants who are Highly Compensated Employees does not exceed the ADP for participants who were Non-highly Compensated Employees in the prior Plan Year by more than 2 percentage points.

For the first Plan, Year the Plan permits any participant to make Elective Deferrals (and this is not a successor plan), for purposes of the foregoing tests, the prior year's Non-highly Compensated Employees' ADP shall be 3 percent unless the Employer has elected in the adoption agreement to use the Plan Year's ADP for these participants.

Current Year Testing If elected by the Employer in the adoption agreement, the ADP tests in 1 and 2, above, will be applied by comparing the current Plan Year's ADP for participants who are Highly Compensated Employees with the current Plan Year's ADP for participants who are Non-highly Compensated Employees. Once made, the Employer can elect Prior Year Testing for a Plan Year only if the Plan has used Current Year Testing for each of the preceding 5 Plan Years (or if lesser, the number of Plan Years the Plan has been in existence) or if, as a result of a merger or acquisition described in Code section 410(b)(6)(C)(i), the Employer maintains both a plan using Prior Year Testing and a plan using Current Year Testing and the change is made within the transition period described in section 410(b)(6)(C)(ii).

Special Rules:

68 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

A participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a participant is a Non-highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year.
The ADP for any participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Code section 401(k), that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Nonelective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more CODAs of the Employer that have different plan years, all Elective Deferrals made during the Plan Year under all such arrangements shall be aggregated. Certain plans shall be treated as separate if mandatorily disaggregated under regulations under Code section 401(k).
In the event that this Plan satisfies the requirements of Code sections 401(k), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the ADP of employees as if all such plans were a single plan. If more than 10 percent of the Employer's Non-highly Compensated Employees are involved in a plan coverage change as defined in Regulation section 1.401(k)-2(c)(4), then any adjustments to the Non-highly Compensated Employees' ADP for the prior year will be made in accordance with such Regulations, unless the Employer has elected in the adoption agreement to use the Current Year Testing method. Plans may be aggregated in order to satisfy section 401(k) only if they have the same Plan Year and use the same ADP testing method.
For purposes of determining the ADP test, Elective Deferrals, Qualified Nonelective Contributions and Qualified Matching Contributions must be made before the end of the 12month period immediately following the Plan Year to which the contributions relate.

Definition:

"Actual Deferral Percentage" ("ADP") shall mean, for a specified group of participants (either Highly Compensated Employees or Non-highly Compensated Employees) for a Plan Year, the average of the ratios (calculated separately for each participant in such group) of (1) the amount of employer contributions actually paid over to the trust on behalf of such participant for the Plan Year to (2) the participant's Compensation for such Plan Year. Employer contributions on behalf of any participant shall include: (1) any Elective Deferrals (other than Catch-up Contributions) made pursuant to the participant's deferral election (including Excess Elective Deferrals of Highly Compensated Employees), but excluding (a) Excess Elective Deferrals of Non-highly Compensated Employees that arise solely from Elective Deferrals made under the Plan or plans

69 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

of this employer and (b) Elective Deferrals that are taken into account in the Actual Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals); and (2) if elected by the Employer in the adoption agreement, Qualified Nonelective Contributions and Qualified Matching Contributions. For purposes of computing Actual Deferral Percentages, an employee who would be a participant but for the failure to make Elective Deferrals shall be treated as a participant on whose behalf no Elective Deferrals are made.

Sample Adoption Agreement Language:

In determining Elective Deferrals for the purpose of the ADP test, the Employer shall include

[ELECT, AS APPROPRIATE]:

[ ] a. Qualified Matching Contributions

[ ] b. Qualified Nonelective Contributions

under this Plan or any other plan of the Employer.

(Note to reviewer: A Pre-approved Plan is not permitted to use QNECs and/or QMACs to correct a failed ADP test where prior year testing is being used.)

The amount of Qualified Matching Contributions made under section [ ] of the Plan and taken into account as Elective Deferrals for purposes of calculating the Actual Deferral Percentage shall be:

[ ] a. All such Qualified Matching Contributions.

[ ] b. Such Qualified Matching Contributions that are needed to meet the Actual Deferral Percentage test stated in section [ ] of the Plan. (Box b can only be checked if the Employer has elected in the adoption agreement to use the Current Year Testing method.)

The amount of Qualified Nonelective Contributions made under section [ ] of the Plan and taken into account as Elective Deferrals for purposes of calculating the Actual Deferral Percentages shall be:

[ ] a. All such Qualified Nonelective Contributions.

[ ] b. Such Qualified Nonelective Contributions that are needed to meet the Actual Deferral Percentage test stated in section [ ] of the Plan. (BOX B CAN ONLY BE CHECKED IF THE EMPLOYER HAS ELECTED IN THE ADOPTION AGREEMENT TO USE THE CURRENT YEAR TESTING METHOD.)

If this is not a successor plan, then, if checked [ ], for the first Plan Year this Plan permits any participant to make Elective Deferrals, the ADP used in the ADP test for participants who are

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Non-highly Compensated Employees shall be such first Plan Year's ADP. (DO NOT CHECK THIS BOX IF THE EMPLOYER HAS ELECTED IN THE ADOPTION AGREEMENT TO USE THE CURRENT YEAR TESTING METHOD.)

(Note to reviewer: See CODA LRM XII for Sample Adoption Agreement Language for current year / prior year testing option.)