As per the 401(m) regulations, you may borrow elective deferrals for usage in ACP testing only if the ADP test passes prior to and after the "paper shift".

However, if excess contrib refunds are processed to correct a failing adp test, logic would suggest, based on the Regulations, that deferrals can be borrowed to help a failing acp test pass. Does anyone agree/disagree with this thinking?

Too aggressive for me, but I've seen that view before.

If you correct an adp test with refunds, the test is passing.

If you then take elective deferral to help acp, your nhce's adp would be lower, thus failing after the paper shift (we call it the "beg borrow and steal method")

Or am I missing some salient point?

Actually, the adp test will pass before and after the "paper shift".:

adp hce - 6.5% acp hce - 3%
adp nhce - 3.5% acp nhc3 - 1%
Initially fails, and need to refund 1% of hce adp%

After refunds
adp hce - 5.5%
adp nhce - 3.5%
PASSES

acp hce - 3%
acp nhce - 1%
FAILS

After borrowing down adp for BOTH hce's & nhce's to bring adp for nhce's to 2%

adp hce - 4% acp hce - 3% + 1.5% borrowed from adp = 4.5%
adp nhces - 2% acp nhce - 1% + 1.5% borrowed from adp = 2.5%
PASSES PASSES

This approach is aggressive, but defensible based on the regulations. I'd do it but disclose to the client.

Your example is somewhat simplified, helpful to make your point but don't overlook something. Because of the way post-1996 ADP tests are corrected (by reducing HCEs starting with the highest dollar amount), your ADP test numbers after you make refunds won't by 3.5% and 5.5% but rather the HCE average will be somewhat higher than 5.5%. The corrective method of refunds will deem you to have passed the ADP test, but your average percentages won't quite be the same as shown in your example. Sorry if I'm not explaining this very well.

I believe in order to be able to shift, the plan must pass ADP with and without the shifted deferrals. Your plan fails ADP in the first place, so there really aren't any deferrals you can shift. See the treas. reg. 1.401(m)-1(b)(5).

The other view would argue that after the refund you have a passing test, thus you could shift.