What Is a 401(k) Corrective Distribution?

A 401(k) corrective distribution is not necessarily a refund of money the participant contributed illegally. In ADP and ACP testing, it can be required because the plan failed a group nondiscrimination test even though every affected participant stayed within the individual federal contribution limits.

That is the starting point for understanding the annual "401(k) refund" received by many highly compensated employees.

A corrective distribution can arise from several different failures.

This article focuses on the two that come from:

• the Actual Deferral Percentage test, or ADP
• the Actual Contribution Percentage test, or ACP.

Those corrections use terminology and calculations that are easy to confuse with other 401(k) excesses.

Four Different "Excess" Problems

The word excess does too much work in retirement-plan administration.

The labels are similar.

The correction procedures are not.

INV-100 covers Section 402(g) excess deferrals.

INV-099 covers Section 415 annual additions.

An ADP Refund Does Not Mean the HCE Broke the Individual Limit

Assume an HCE contributes:

$20,000

during 2026.

That is below the 2026 basic elective-deferral limit.

The plan then runs its ADP test.

The NHCE contribution pattern is low enough that the HCE group is permitted an average deferral rate lower than the group actually achieved.

The plan fails.

The HCE can receive a corrective distribution even though:

• the employee never exceeded Section 402(g)
• payroll followed the employee's valid election
• the contribution was permitted when deposited
• the plan document allowed the deferral.

The problem arises at the group test.

Not the individual limit.

ADP Failures Create "Excess Contributions"

In the ADP context, the regulatory term is:

excess contributions

These are the amounts that must be addressed so the cash-or-deferred arrangement satisfies Section 401(k)(3).^[1][2]

Do not confuse that term with:

excess deferrals

under Section 402(g).

An HCE can have one without the other.

ACP Failures Create "Excess Aggregate Contributions"

ACP generally measures:

• employer matching contributions
• employee non-Roth after-tax contributions
• other contribution sources specifically taken into account under the ACP rules.

When the HCE group exceeds the permitted relationship to the NHCE group, the correction amount is called:

excess aggregate contributions.^[1][3]

The law generally uses a correction structure parallel to ADP, but the contribution sources create important differences.

An excess match can have vesting.

An after-tax employee contribution can contain tax basis.

Those issues do not arise the same way in a simple pre-tax ADP refund.

A Corrective Distribution Is a Plan Correction, Not a Withdrawal Request

The participant does not receive the payment because they asked to withdraw money.

The plan distributes it because the plan needs to correct a qualification failure under its document and the tax rules.^[1][2][3]

That distinction affects:

• timing
• tax reporting
• rollover eligibility
• early-distribution tax
• participant consent.

Calling the payment a:

withdrawal

can send the participant toward the wrong tax rules.

The IRS Uses a Four-Step ADP Distribution Process

Treasury Regulation §1.401(k)-2 describes correction through distribution as a four-step process.^[2]

Step 1

Determine the total amount of excess contributions.

Step 2

Apportion that total amount among the HCEs.

Step 3

Determine income or loss allocable to the assigned excess.

Step 4

Distribute the excess and allocable income.

The subtle point is that Step 1 and Step 2 use different leveling methods.

That is why the final refund can surprise participants.

Step 1 Uses Percentage Leveling

To determine how much the plan must remove in total, the regulation starts with HCE actual deferral ratios.

The HCE with the highest deferral percentage is reduced toward the next-highest HCE percentage.

If the test still fails, the process continues downward until the hypothetical reduced HCE group passes.^[2]

This answers:

How much excess exists in the plan?

It does not yet answer:

Which HCE gets how much refunded?

Example: Determine the Total ADP Excess

Assume three HCEs have the following 2026 data.

Assume the maximum permitted HCE ADP is:

7%

Actual HCE ADP:

(6% + 8% + 10%) ÷ 3 = 8%

The plan fails.

First percentage reduction

Reduce C from 10% to B's 8%.

C reduction:

2% × $50,000 = $1,000

New ratios:

• A: 6%
• B: 8%
• C: 8%

Average:

7.33%

Still too high.

Second percentage reduction

B and C must each be reduced enough for the average to reach 7%.

Combined reduction in group percentage points needed:

1 percentage point total across three HCEs

A stays at 6%.

B and C each drop from 8% to 7.5%.

Dollar reduction:

B:

0.5% × $100,000 = $500

C:

0.5% × $50,000 = $250

Total excess contributions:

$1,000 + $500 + $250 = $1,750

The plan has now calculated the total ADP excess.

But it has not yet determined who receives the $1,750 refund.

Step 2 Uses Dollar Leveling

The regulation then changes the unit of analysis.

The total excess is apportioned among HCEs beginning with the HCE who has the highest dollar amount of contributions taken into account in ADP.^[2]

The highest-dollar HCE is reduced toward the next-highest dollar HCE.

The process continues until the already-determined total excess has been assigned.

This answers:

Who receives the corrective distribution?

Percentage leveling and dollar leveling solve two different problems.

The HCE With the Highest Percentage May Not Get the Largest Refund

Use the same example.

HCE contribution dollars before correction:

• A: $12,000
• B: $8,000
• C: $5,000

Total excess to assign:

$1,750

The highest dollar amount belongs to:

HCE A

even though A had the lowest percentage at 6%.

A's $12,000 can be reduced by the full $1,750 and would still remain above B's $8,000:

$12,000 − $1,750 = $10,250

So under the dollar-leveling step, the entire $1,750 can be apportioned to A in this simplified example.

The HCE with:

10% ADR

can receive no refund.

The HCE with:

6% ADR

can receive the entire refund.

That is not a contradiction.

Step 1 found the plan's excess using percentages.

Step 2 assigned that excess using dollars.

Why the Two-Step Method Exists

If refunds were simply paid to the HCEs with the highest percentages, two employees with very different compensation could receive correction amounts that do not follow the statutory apportionment rule.

The regulation separates:

test failure measurement

from:

refund assignment.

This prevents a common spreadsheet error:

1. calculate the HCE percentage reductions needed to pass
2. refund those exact percentage-reduction dollars to those same HCEs.

That is not necessarily the final required distribution.

The plan must perform the apportionment step.

The Total Excess Is Fixed Before Dollar Apportionment

Once Step 1 determines:

$1,750

of total excess contributions, Step 2 does not recalculate whether the ADP would pass after each actual participant refund.

It apportions the already-determined total excess under the dollar-leveling rule.^[2]

That distinction is conceptually important.

The final participant refunds are not a second ADP test.

They are an allocation of the correction amount.

An HCE Cannot Be Refunded More Than the Plan Actually Received

The ADP regulation limits the amount apportioned to an HCE to contributions actually made to the plan for that HCE for the plan year.^[2]

This matters when the employee participates in more than one plan of the same employer and the test aggregates contributions across arrangements.

The calculation can see a larger total for testing than one specific plan actually holds.

The corrective distribution from that plan cannot exceed what that plan received for the participant.

ACP Uses the Same General Two-Stage Structure

Treasury Regulation §1.401(m)-2 uses a parallel approach.^[3]

First:

determine the total excess aggregate contributions by reducing the highest HCE contribution ratios.

Then:

apportion the total dollar excess among HCEs beginning with the highest dollar amount of tested contributions.

The arithmetic framework is similar to ADP.

The source of money is not.

ACP Can Contain Matching Money and After-Tax Employee Money

Suppose an HCE's ACP numerator includes:

• $8,000 employer match
• $12,000 employee after-tax contributions.

If part of that amount becomes an excess aggregate contribution, the correction has to preserve the source characteristics.

That can affect:

• vesting
• taxable basis
• forfeiture
• Form 1099-R reporting.

A $10,000 ACP corrective amount is not automatically a $10,000 taxable cash refund.

Unvested Excess Match Can Be Forfeited

IRS guidance specifically notes that excess aggregate contributions consisting of matching contributions can have a nonvested portion.^[1]

Assume:

Excess aggregate matching contribution assigned to HCE:

$10,000

Vesting:

60%

Simplified vested portion:

$6,000

Simplified nonvested portion:

$4,000

The plan may distribute the vested corrective amount and treat the unvested amount through forfeiture and reallocation or an unallocated account under the applicable plan and correction rules.^[1][3]

The employee does not receive money they never owned.

ADP Refunds Can Also Affect Related Matching Contributions

Suppose the employer made a match on elective deferrals.

Later, part of the HCE's elective deferral is distributed as an ADP excess contribution.

If the matching contribution attributable to that refunded deferral remains in the HCE's account, the match can become discriminatory.

Treasury Regulation §1.401(k)-2 specifically addresses forfeiture of matching contributions attributable to:

• excess contributions
• excess aggregate contributions
• excess deferrals

when necessary to avoid a Section 401(a)(4) problem.^[2]

The correction therefore may involve:

refund the elective contribution

plus:

forfeit the related match.

A participant looking only at the refund check can miss the second account adjustment.

Corrective Distributions Include Allocable Earnings or Loss

The principal excess is not the entire correction.

The plan must calculate allocable income or loss.^[2][3]

For plan years beginning on or after January 1, 2008, the ADP regulation generally measures allocable gain or loss through:

the end of the plan year for which the excess contribution was made.^[2]

The ACP regulation uses the parallel rule.^[3]

This means the ordinary calculation does not include post-year-end "gap period" earnings for these plan years.

Example: $6,000 Excess With Earnings

Assume:

Assigned ADP excess contribution:

$6,000

Allocable gain through December 31:

10%

Allocable income:

$600

Corrective distribution:

$6,600

If the account then gains another 5% between January 1 and the actual correction date, that later gain is generally not added to the ordinary ADP allocable-income amount under the post-2007 regulation.^[2]

The correction calculation and the participant's account performance after year-end are separate.

A Loss Can Reduce the Distribution

Allocable income can be negative.

Assume:

Assigned excess:

$6,000

Allocable loss through year-end:

$400

Corrective payment:

$5,600

The plan should use a reasonable and consistently applied earnings method permitted by the regulation.^[2][3]

A corrective distribution is not automatically equal to the original excess principal.

The 2½-Month Deadline Is Not the Final Correction Deadline

This is one of the most persistent misunderstandings.

For a calendar-year plan, 2½ months after December 31 is generally:

March 15

Section 4979 provides an excise-tax incentive to correct qualifying excess contributions or excess aggregate contributions by that early deadline.^[4][5][6]

But the ordinary ADP/ACP statutory correction period generally continues for:

12 months after the end of the tested plan year.^[1][2][3]

March 15 and December 31 answer different questions.

What March 15 Usually Controls

For an ordinary calendar-year plan, correcting excess contributions or excess aggregate contributions within 2½ months can avoid the employer's Section 4979 excise tax when the statutory conditions are satisfied.^[4][5]

If the plan waits beyond that point, correction can still be possible within the 12-month statutory period.

But the employer may owe:

10% excise tax

on the applicable excess.^[1][4][5][6]

The participant does not pay that Section 4979 tax.

The employer does.^[4]

Certain EACAs Get Six Months

Section 4979 extends the early correction period to:

six months

for qualifying excess contributions or excess aggregate contributions involving an eligible automatic contribution arrangement, or EACA, when the statutory and regulatory conditions are satisfied.^[4][5]

For a calendar-year plan, six months after December 31 is generally:

June 30

Do not assume every plan with automatic enrollment gets June 30.

The EACA conditions matter.

Calendar-Year 2026 Timeline

Plan year ends:

December 31, 2026

March 15, 2027

Ordinary 2½-month Section 4979 deadline.

A qualifying correction by this date generally avoids the 10% employer excise tax.^[1][4][5]

June 30, 2027

Potential six-month Section 4979 deadline for a qualifying EACA.^[4][5]

December 31, 2027

End of the ordinary 12-month statutory correction period for the 2026 ADP/ACP failure.^[1][2][3]

A correction on:

April 15, 2027

can therefore be:

• too late for the ordinary 2½-month excise-tax exception
• still within the ordinary 12-month correction period.

"Late" needs a noun.

Late for what?

The 10% Excise Tax Is Not the 10% Early-Withdrawal Tax

Two different 10% taxes can appear in retirement-plan discussions.

Section 4979 excise tax

Paid by:

employer

Trigger:

late correction of applicable ADP/ACP excesses beyond the early statutory period.^[4][5][6]

Section 72(t) additional tax

Potentially paid by:

participant

Trigger:

certain early retirement-plan distributions.

Qualifying corrective distributions of excess contributions and excess aggregate contributions are not subject to the 10% Section 72(t) early-distribution tax.^[7]

Same percentage.

Different taxpayer.

Different statute.

Different event.

Corrective Distributions Generally Cannot Be Rolled Over

IRS distribution guidance excludes corrective distributions of excess deferrals or contributions, including allocable income, from rollover eligibility.^[7][10]

So an HCE who receives an ADP refund generally cannot solve the current-year tax result by depositing the payment into an IRA as a tax-free rollover.

The corrective payment is not an eligible rollover distribution.

That is true even though the money came from a 401(k).

ADP Excess Contributions Are Generally Taxable in the Distribution Year

IRS Publication 525 states that a corrective distribution of excess contributions and allocable income is included in the HCE's income in the year of distribution.^[8]

IRS also requires Form 1099-R reporting.^[7][8][9]

Assume:

2026 ADP failure

Corrective distribution made:

March 2027

The refund is generally part of the participant's:

2027

tax reporting, subject to the character of the source.

That differs from the Section 402(g) excess-deferral rules, which can tie taxation of pre-tax excess deferrals to the year of deferral.

Another reason not to mix the correction types.

Roth Principal Changes the Taxable Amount

An HCE can make both:

• pre-tax elective deferrals
• designated Roth elective deferrals.

If an ADP corrective distribution includes designated Roth contribution principal, that principal has already been included in taxable wages.

The 2026 Form 1099-R instructions distinguish designated Roth amounts when determining the taxable portion of an excess-contribution corrective distribution.^[7]

Earnings can still be taxable.

The plan's source accounting matters.

ACP After-Tax Contributions Also Contain Basis

An ACP corrective distribution can include employee after-tax contributions.

Those dollars were already taxed when contributed.

IRS Form 1099-R instructions state that the taxable amount of an excess aggregate contribution distribution excludes applicable after-tax contribution basis, while earnings generally remain taxable.^[7]

A participant should not assume:

gross Form 1099-R amount = taxable amount

for every ACP correction.

Box 2a matters.

Form 1099-R Is Part of the Correction

IRS says affected HCEs should receive notice of the corrective distribution and a Form 1099-R that includes the returned amount and associated income.^[9]

The participant should reconcile:

• plan correction notice
• payment received
• Form 1099-R box 1
• taxable amount in box 2a
• distribution code
• pre-tax/Roth/after-tax source.

A "401(k) refund" without source-level tax reporting is incomplete information.

A Later-Discovered Failure Can Require Corrected Reporting

The 2026 Form 1099-R instructions address a specific awkward case.

Suppose a participant receives a total plan distribution in 2026.

The plan later discovers in 2027 that the 2026 ADP or ACP test failed.

Part of the earlier total distribution must be recharacterized as excess contributions or excess aggregate contributions.

The payer may need to:

• correct the original Form 1099-R
• issue a separate Form 1099-R for the corrective amount and allocable earnings.^[7]

A participant's account reaching $0 does not erase a later testing failure.

Corrective Distributions Generally Do Not Need Participant Consent

The ADP and ACP regulations permit required corrective distributions under plan terms without the ordinary participant or spousal consent rules otherwise associated with some retirement-plan distributions.^[2][3]

That makes sense operationally.

If every HCE could decline the refund, one participant could prevent the plan from correcting a failed nondiscrimination test.

The participant owns the money economically only subject to the qualification rules governing the plan.

A Plan Cannot Park ADP Excesses in Suspense for Next Year

Treasury Regulation §1.401(k)-2 states that excess contributions cannot simply remain unallocated or be placed in a suspense account for future allocation as a substitute for one of the permitted ADP correction methods.^[2]

The correction methods include:

• qualifying QNECs or QMACs
• distribution
• recharacterization
• permitted combinations.^[2]

"Leave it there and offset next year's deferrals" is not a valid ordinary ADP correction.

Corrective Distribution vs. QNEC/QMAC Correction

A failed ADP test can often be attacked from either side.

Lower the HCE side

Corrective distribution.

Raise the NHCE side

Qualifying QNEC or QMAC.

Those routes can have very different economics.

Assume total ADP excess is:

$50,000

Distribution route

HCE accounts lose:

$50,000 plus/minus allocable earnings

subject to the required apportionment.

QNEC route

Employer may contribute enough to NHCEs to raise the NHCE ADP so the test passes.

No HCE refund may be needed if the contribution fully solves the failure.

The employer trades current cash or plan forfeiture assets for preservation of HCE plan balances.

INV-106 and INV-107 cover QNECs and QMACs.

The Plan Can Combine Correction Methods

Treasury Regulation §1.401(k)-2 permits a plan to use a combination of permitted ADP correction methods when the plan terms support them.^[2]

If QNECs or QMACs are used along with distribution or recharacterization, the qualifying employer contributions are taken into account before the remaining excess is distributed or recharacterized.^[2]

That sequence matters.

A sponsor should not calculate the full refund first and then casually add a QNEC without rerunning the required correction.

Catch-Up Recharacterization Can Reduce the Refund

The ADP regulation also permits excess contributions to be recharacterized under the applicable rules.^[2]

For a catch-up-eligible participant, IRS guidance notes that some amount otherwise refunded can potentially receive catch-up treatment when:

• the plan permits catch-up contributions
• the participant satisfies the applicable age or eligibility rule
• unused catch-up room remains.^[1]

That can preserve money inside the plan.

The 2026 Roth catch-up rules can affect the tax character of catch-up contributions for certain participants.

The plan should resolve catch-up treatment before finalizing the cash refund.

Correction Ordering Matters When Section 402(g) Also Failed

An HCE can simultaneously have:

• an excess deferral under Section 402(g)
• an excess contribution under ADP.

Treasury regulations coordinate the corrections so the same contribution is not refunded twice.^[2]

Amounts previously distributed to correct Section 402(g) can reduce the ADP excess distribution for the same participant under the applicable coordination rules.

The plan needs a correction ledger.

Not two independent refund calculations.

An ACP Correction Can Include Forfeiture Instead of Cash

The ACP regulation permits excess aggregate contributions to be distributed or, if forfeitable, forfeited under the applicable rules.^[3]

This can create a correction notice that looks odd to the participant.

Example:

Assigned ACP excess:

$10,000

Cash corrective distribution:

$6,000

Account forfeiture:

$4,000

The participant may ask why the refund was not $10,000.

Answer:

the unvested $4,000 was never a fully owned benefit.

The plan corrected it through forfeiture rather than cash payment.

Forfeited ACP Amounts Stay in the Plan

A forfeited matching contribution does not become an unrestricted employer refund.

The plan must handle the forfeiture under:

• plan terms
• qualified-plan rules
• applicable forfeiture-use rules.

INV-105 covers that process.

The ACP correction solves one compliance issue.

It does not suspend the separate rules governing forfeiture assets.

The Participant's Refund Can Differ From the Amount the Test "Reduced"

This point follows from the two-stage calculation.

In Step 1, the plan reduces HCE ratios hypothetically to determine:

total excess

In Step 2, it assigns that excess according to:

HCE contribution dollars

So a testing report may show one HCE creating much of the percentage problem while a different HCE receives more of the actual refund.

That is expected under the regulation.

It is not evidence that the administrator reversed two names.

Worked Example: Percentage Leveling vs. Dollar Leveling

Assume:

Assume maximum permitted HCE ADP:

7%

Actual HCE ADP:

8%

Percentage leveling

Reduce C from 10% to 8%.

Dollar reduction:

2% × $60,000 = $1,200

New average:

7.33%

Reduce B and C by another 0.5 percentage point each.

B:

$120,000 × 0.5% = $600

C:

$60,000 × 0.5% = $300

Total excess:

$2,100

Dollar leveling

Contribution dollars:

• A: $14,400
• B: $9,600
• C: $6,000

A has the highest dollar amount.

Reducing A by the entire $2,100 leaves:

$12,300

still above B's $9,600.

So the full:

$2,100

can be apportioned to A.

Result:

HCE A receives the refund even though HCE C had the highest original ADR.

That is the regulatory architecture in one example.

Worked Example: Earnings Change the Check

Assigned ADP excess:

$8,000

Allocable year-end gain:

$720

Corrective distribution:

$8,720

The participant's test report may show:

$8,000 excess

while the actual payment is:

$8,720

Both can be correct.

One is principal.

The other is principal plus allocable income.

Worked Example: March 15 vs. December 31

Calendar-year 2026 plan fails ADP.

Correction on March 10, 2027

Within ordinary 2½-month period.

Potential result:

• statutory correction timely
• ordinary Section 4979 excise tax avoided if requirements are satisfied.

Correction on April 15, 2027

After ordinary 2½-month period but within 12 months.

Potential result:

• statutory correction still timely
• employer can owe Section 4979 excise tax.^[1][4][5]

Correction on December 20, 2027

Still within ordinary 12-month statutory period.

Potential result:

• test can still be corrected through the statutory method
• employer excise-tax consequences can remain.

Failure discovered in 2028

Ordinary 12-month statutory period has expired.

Now the sponsor is generally dealing with:

EPCRS

rather than merely a late ordinary statutory refund.^[1][11]

After the 12-Month Period, the Problem Changes

IRS states that failure to correct ADP or ACP by the end of the statutory correction period is an operational qualification failure.^[1][11]

EPCRS can provide correction routes.

The correction may require more than sending out the refund that should have been made earlier.

IRS's Fix-It Guide describes post-statutory-period methods that can require QNECs for NHCEs, including a one-to-one correction structure.^[1]

The cost of waiting can therefore increase materially.

The One-to-One EPCRS Method Is More Expensive Than an Ordinary Refund

Under the IRS-described one-to-one method after the ordinary statutory period:

1. excess contributions plus earnings are assigned and distributed to HCEs
2. an equal dollar amount is contributed as a QNEC
3. that QNEC is allocated to eligible NHCEs based on compensation.^[1]

The employer can therefore experience:

money out of HCE accounts

plus:

new employer money into NHCE accounts.

That is different from simply correcting within the normal statutory window.

Timing has economic consequences.

Form 5330 Belongs to the Employer Side

When Section 4979 excise tax applies, the employer reports the tax on:

Form 5330.^[6]

The current Form 5330 instructions provide a specific Schedule H for excess contributions and excess aggregate contributions.^[6]

The participant receiving the corrective distribution does not file Form 5330 merely because they received a refund.

Participant tax reporting generally centers on:

Form 1099-R.

What a Participant Should Check

If you receive an unexpected 401(k) corrective distribution, identify:

1. Which failure caused it? - ADP excess contribution? - ACP excess aggregate contribution? - Section 402(g) excess deferral? - Section 415 excess annual addition?

2. Which contribution source was refunded? - pre-tax? - Roth? - employee after-tax? - vested match?

3. Were earnings or losses included?

4. Did related matching contributions get forfeited?

5. What does Form 1099-R show as taxable?

6. Is the payment rollover-eligible? - for ordinary ADP/ACP correction, generally no.

7. Was the payment made under a statutory correction or EPCRS?

Those seven questions usually explain the transaction faster than asking:

"Why did my 401(k) send me money?"

What a Plan Sponsor Should Reconcile

Before releasing refunds, the correction file should contain:

A one-line record saying:

ADP refund — $8,720

is not an adequate correction file.

Frequently Asked Questions

Why did my 401(k) refund money if I did not exceed the annual limit?

Because an ADP or ACP test is a group nondiscrimination test. Your contribution can be legal under the individual federal limit and still be partly refundable because the HCE group exceeded the plan's permitted relationship to NHCE contribution rates.^[1]

Is an ADP refund the same as an excess deferral?

No.

An ADP excess contribution results from Section 401(k) nondiscrimination testing.

An excess deferral results from exceeding the individual Section 402(g) elective-deferral limit.

What is an excess aggregate contribution?

It is the correction amount associated with a failed ACP test under Section 401(m).^[1][3]

Who gets an ADP corrective distribution?

The IRS calculation first determines the total excess by reducing the highest HCE percentages, then apportions that total excess among HCEs beginning with the highest dollar contribution amounts.^[2]

The person with the highest deferral percentage does not necessarily receive the largest refund.

Are earnings included?

Yes. The plan calculates allocable gain or loss under the applicable regulation.^[2][3]

For post-2007 plan years, ordinary ADP/ACP allocable income is generally measured through the end of the tested plan year.

Is March 15 the final correction deadline?

No.

For a calendar-year plan, March 15 is generally the ordinary 2½-month deadline tied to avoiding the Section 4979 employer excise tax.

The broader statutory correction period generally extends 12 months after the end of the tested plan year.^[1][4][5]

What is the six-month deadline?

Qualifying EACAs can receive a six-month Section 4979 early-correction period instead of 2½ months, subject to the statutory and regulatory conditions.^[4][5]

Who pays the 10% late-correction excise tax?

The employer.^[4]

Is my corrective distribution subject to the 10% early-withdrawal penalty?

Qualifying corrective distributions of excess contributions and excess aggregate contributions are not subject to the 10% additional tax on early distributions.^[7]

Can I roll the refund into an IRA?

Generally no. IRS guidance excludes corrective distributions from rollover eligibility.^[8][10]

Is the refund taxable?

Pre-tax excess contributions and allocable earnings are generally taxable in the year distributed.^[7][8][9]

ACP distributions involving employee after-tax contributions or designated Roth amounts can contain nontaxable principal, while earnings can remain taxable.^[7]

Will I receive a Form 1099-R?

Yes. IRS guidance calls for Form 1099-R reporting of corrective distributions.^[7][8][9]

What happens to unvested excess matching contributions?

They can be forfeited rather than distributed under the applicable ACP and plan rules.^[1][3]

Can a related match be forfeited after an ADP refund?

Yes. Matching contributions attributable to refunded elective deferrals can require forfeiture to avoid a separate nondiscrimination problem.^[2]

Can the employer just leave the excess in the plan for next year?

Not as an ordinary ADP correction. Treasury regulations specify permitted correction methods and prohibit simply leaving excess contributions unallocated or in a future suspense arrangement as a substitute.^[2]

What if the failure is discovered after the 12-month period?

The sponsor generally needs to use an available EPCRS correction method rather than treating the payment as an ordinary timely statutory correction.^[1][11]

The ROIStreet Corrective Distribution Reconciliation

Use this order:

Identify the failure → identify the contribution source → calculate the HCE group excess by percentage leveling → apportion the total excess by dollar leveling → calculate allocable earnings or loss → separate vested and unvested ACP sources → address related match → coordinate Section 402(g) and catch-up treatment → check 2½-month / EACA six-month / 12-month timing → distribute or forfeit → issue Form 1099-R → file Form 5330 if required

The calculation should not start with:

"Which executive contributed the highest percentage?"

That identifies only part of the test problem.

For ADP and ACP corrections, the IRS first determines how much the plan must remove. Only then does it determine which HCE accounts bear that correction.

Sources & References

1. Internal Revenue Service: 401(k) Plan Fix-It Guide — Failed ADP and ACP Nondiscrimination Tests — https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests
2. Electronic Code of Federal Regulations / Cornell LII: 26 CFR §1.401(k)-2 — ADP Test — https://www.law.cornell.edu/cfr/text/26/1.401%28k%29-2
3. Electronic Code of Federal Regulations / Cornell LII: 26 CFR §1.401(m)-2 — ACP Test — https://www.law.cornell.edu/cfr/text/26/1.401%28m%29-2
4. U.S. Code / Cornell LII: 26 U.S.C. §4979 — Tax on Certain Excess Contributions — https://www.law.cornell.edu/uscode/text/26/4979
5. Electronic Code of Federal Regulations / Cornell LII: 26 CFR §54.4979-1 — Excise Tax on Certain Excess Contributions and Excess Aggregate Contributions — https://www.law.cornell.edu/cfr/text/26/54.4979-1
6. Internal Revenue Service: Instructions for Form 5330 — https://www.irs.gov/instructions/i5330
7. Internal Revenue Service: 2026 Instructions for Forms 1099-R and 5498 — https://www.irs.gov/instructions/i1099r
8. Internal Revenue Service: Publication 525 — Taxable and Nontaxable Income — https://www.irs.gov/publications/p525
9. Internal Revenue Service: Retirement Topics — Notices — https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-notices
10. Internal Revenue Service: 401(k) Resource Guide — General Distribution Rules — https://www.irs.gov/retirement-plans/plan-sponsor/401k-resource-guide-plan-sponsors-general-distribution-rules
11. Internal Revenue Service: Self-Correction Program FAQs — https://www.irs.gov/retirement-plans/self-correction-program-scp-faqs
12. Internal Revenue Service: Employee Plans Corrective Distributions Compliance Project — https://www.irs.gov/retirement-plans/employee-plans-learn-educate-self-correct-and-enforce-project-corrective-distributions-as-reported-on-schedules-h-or-i-line-2f-project-number-8

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ROIStreet publishes educational content about retirement-plan nondiscrimination testing and correction. This article is not legal, tax, actuarial, fiduciary or plan-administration advice. Corrective distributions depend on the written plan, contribution source, HCE classification, testing method, participant compensation, vesting, Roth and after-tax basis, earnings methodology, correction date, EACA status, Section 4979 exposure, Form 1099-R reporting and current IRS and Treasury guidance.

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