If they do and the company fails to correct it, the retirement plan could lose its status as a qualified tax-deferred plan. This would mean that everyone's money would be refunded and the plan would go out of operation. Say XYZ Co. has 10 employees, three of whom are considered highly compensated. There are a few techniques employers use to make sure their plans pass the test. The most common remedy is for employers to refund the excess money to employees.
Refunds tend to be somewhat unpopular, though.
First, the money is viewed as taxable income by the IRS, so it can increase your adjusted gross income. Further, you can lose the ability to invest the money tax-deferred. Plus, you might only get the refund after you file your tax return, since refunds can be made up until the tax filing date, so you may have to file an amended return. Some plans try to avoid failing non-discrimination tests by slapping on contribution limits for HCEs. Along those lines, some employers test their plans regularly through the year.