FAQ 769: ADP--Borrowing method

Problem: I'm having trouble understanding how the borrowing method is being used on the attached ADP/ACP test. On the ADP report under C. Step Two - To help a plan pass a failing ACP test, we are permitted to borrow a portion of the ADP percentages and apply them to the ASC percentages. The borrowing method is only allowed if, following any necessary corrective action, the plan passes the ADP test using the Standard Method. Under the original test, the ADP test failed. When the borrowing method was used the report showed the ADP test passed. However, the correction part of the test still shows the ADP test failed with corrections. How are you able to borrow from the ADP test if the test fails? By borrowing from the ADP test are the refunds for the ACP test lower?

Solution: ASC will put the ADP in a passing position by calculating necessary returns or QNECs and then borrow to the ACP test. This will make the ACP refunds lower to HCEs. What your Borrowing page is reflecting is that the ADP test was “put in a passing state” by making the corrective distributions. And it was put in enough of a passing state to be able to borrow a little bit to help the ACP test - After the corrective distribution the new ADP percents were 9.67% and 7.67%, so by moving 5.67% that puts the ADP at 4.00% and 2.00% which is still passing. So the 5.67% can be moved to the ACP test. Without borrowing, the HCE's ACP average would have to be brought down 1.08%; however by borrowing the 5.67%, the HCE's average only has to be brought down by .92% (which results in a lower ACP corrective distribution).