What significant administrative challenge can arise if a CODA plan fails ADP and ACP tests?

If a Cash or Deferred Arrangement (CODA) plan fails the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, one significant administrative challenge that can occur is the potential for employee relations problems. When a plan fails these tests, it indicates that the contributions and deferrals by highly compensated employees are disproportionate when compared to those made by non-highly compensated employees. This disproportion can lead to dissatisfaction among employees who may feel that their contributions are undervalued or that they are being treated unfairly in comparison to higher-paid colleagues.

Moreover, when the plan fails these tests, corrective measures must be taken, which can include returning excess contributions to the highly compensated employees. This process might generate frustration among employees who are affected, leading to decreased morale or trust in the employer's retirement offerings. Communication and transparency become crucial at this point, as employees seek to understand both the implications of plan failures and the steps the employer is taking to rectify the situation.

The other options do not directly relate to the administrative challenges in the context of failed ADP and ACP tests. Higher employer contributions are not necessarily a direct outcome; forfeited contributions typically do not apply; and while it is possible for some employees' eligibility to be impacted