🇺🇸United States

High Recurring Administrative and Professional Fees to Fix ADP/ACP Errors

3 verified sources

Definition

Failed ADP/ACP tests and related data errors (incorrect compensation, late entry dates, missed participants) generate additional work for TPAs, recordkeepers, auditors, and ERISA counsel. Sponsors incur out‑of‑cycle testing fees, correction calculations, re‑runs, and legal review costs beyond normal plan administration expenses.

Key Findings

  • Financial Impact: $5,000–$50,000+ per year in extra professional fees for mid‑size plans that repeatedly fail or have testing errors, depending on complexity and legal involvement.
  • Frequency: Annually for each plan year with failed tests or discovered data errors; can occur multiple times a year if retesting is required after corrective contributions.
  • Root Cause: Fragmented payroll and HRIS data feeding into testing, manual calculations, mid‑year plan amendments affecting test populations, and insufficient controls over data quality. Many sponsors only discover issues at year‑end, requiring iterative rework by external providers who bill time and materials.

Why This Matters

This pain point represents a significant opportunity for B2B solutions targeting Insurance and Employee Benefit Funds.

Affected Stakeholders

Plan sponsor finance and benefits teams, Third‑party administrators and recordkeepers, External ERISA counsel, External auditors for benefit funds

Deep Analysis (Premium)

Financial Impact

$10,000–$40,000 annually across multiple client plans due to failed tests, re-runs, and client satisfaction costs (potential churn risk) • $10,000–$40,000+ annually in TPA testing, audit fees ($10,000+), corrective contributions, and legal consultation • $12,000–$45,000 annually due to failed tests, re-runs, corrective contributions, and IRS excise tax exposure

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Current Workarounds

Benefits Managers consolidate spreadsheets from multiple employers; manual data quality checks; email reminders to late-submitting employers; coordination calls with TPA • Benefits Managers maintain parallel spreadsheets tracking employee contract assignments and corresponding pay band compensation; manual HCE threshold calculations based on multi-contract income aggregation • Benefits Managers manually track employee eligibility status changes (grant-funded vs. core-funded transitions); spreadsheet-based NHCE/HCE classification; back-and-forth emails with finance and HR over compensation timing

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Methodology & Sources

Data collected via OSINT from regulatory filings, industry audits, and verified case studies.

Evidence Sources:

Related Business Risks

Recurring ADP/ACP Test Failures Trigger Corrective Contributions, Excise Tax, and Disqualification Risk

Unplanned corrective contributions often run into tens or hundreds of thousands of dollars per year for mid‑size plans, plus a 10% excise tax on late corrections and potentially multi‑million‑dollar liabilities if disqualification occurs (per IRS correction framework and industry practice).

Refunded HCE Contributions and Missed Executive Deferrals Reduce Retention Value of Plans

Commonly 5–15% of total HCE contributions for failing plans are refunded each year, which for a mid‑size insurance or benefit fund plan can mean $50,000–$250,000 in lost tax‑deferred savings value to executives and reduced long‑term retention benefit.

Data and Setup Errors Cause Mis‑Testing and Costly Rework of ADP/ACP Results

Rework can add thousands to tens of thousands of dollars per year in additional administrative fees and staff time, and may trigger further corrective contributions or clawbacks that change cash flows.

Delayed ADP/ACP Testing and Corrections Extend Refund and Contribution Cycles

Primarily opportunity cost: HCEs lose months of tax‑deferred investment time on refunded amounts and employers delay deductible contributions to NHCEs; late corrections further risk 10% excise taxes.

Manual ADP/ACP Testing Consumes HR/Finance Capacity and Crowds Out Strategic Work

Commonly tens to hundreds of staff hours annually across HR, payroll, and finance, equating to $5,000–$25,000+ in internal labor cost per year for mid‑size organizations, not counting opportunity cost of delayed strategic initiatives.

Testing and Correction Complexity Creates Window for Abusive Contribution Patterns

Potentially significant but highly case‑specific: abusive patterns can shift tens or hundreds of thousands of dollars of annual contribution benefit toward favored HCEs while under‑funding NHCEs, creating fiduciary breach exposure and future restitution costs if detected.

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