A cash or deferred plan must satisfy both the ADP and ACP tests and, after those tests are performed and any corrective distributions made, must satisfy the nondiscrimination rules under §401(a)(4).  After all the testing is done, the HCEs must not have a matching percentage larger than the matching percentage for the NHCEs.  This point is illustrated in the following example:

                                    Employee         Elective                 Matching
                                     Group              Deferral %            Contribution %
                                    HCEs                    6.20%                   1.55%
                                    NHCEs                  4.00%                   1.00%

In this situation the plan must first correct the ADP for HCEs since the spread exceeds the Alternative Limit.  The correction can be made by distributing .20 of elective deferrals to affected HCEs.  After the elective deferrals are distributed, a discriminatory rate of match results because the HCE has now received a rate of match of 1.55% ON 6% instead of 1.5%.  Thus, the HCE received a rate of match that is higher then the 25 cents/dollar that the NHCEs received. This can be corrected by a forfeiture of the excess match.

The problem with this situation is that even though the deferrals have been returned/distributed to the appropriate HCEs, the plan satisfies the ACP test without any corrective distribution of excess aggregate contributions.  In this case the plan must provide for the forfeiture of the excess match (.05%) since there is no basis to distribute the funds. This is true even if the amounts are fully vested.  The plan is placed in the anomalous situation of forfeiting seemingly non-forfeitable amounts.

Nondiscrimination Rules: Code §401(a)(4) and Regulations §1.411(a)-4