One of the alternative methods of satisfying the actual deferral percentage (ADP) test is to “recharacterize” elective deferrals made by highly compensated employees as nonelective, after-tax, contributions. This has the effect of lowering the ADP for the highly compensated group.

Has anyone ever used this method? Why was this method used (what made it preferable to other correction methods such as distribution of the excess contributions)?

I've never used the recharacterization method and of course it does no good at all if the problem is a multiple use limit violation, not just an ADP test failure.

I've discussed it with clients when a collective bargaining unit (with a few employees earning enough to be classified as HCEs) fails the ADP test. Because those plans aren't subject to ACP testing, recharacterization doesn't lead to other testing challenges.

If my ancient memory serves me correct, this may be a holdover from the early days of 401k before after tax contributions were counted as part of ACP test. And no, I've never used it!