Actual Deferral & Actual Contribution Percentage Test (ADP/ACP)

The Actual Deferral & Actual Contribution Percentage Test (ADP/ACP) is a non-discrimination test that is used to ensure that a 401(k) plan does not discriminate in favor of highly compensated employees (HCEs). The test is based on the actual deferral percentages (ADPs) and actual contribution percentages (ACPs) of all employees in the plan.

The ADP is the percentage of an employee's compensation that is deferred into the plan. The ACP is the percentage of an employee's compensation that is contributed by the employer to the plan.

To pass the ADP/ACP test, the ADP of all HCEs must be no more than 125% of the ADP of all non-HCEs. The ACP of all HCEs must be no more than 200% of the ACP of all non-HCEs.

If the plan fails the ADP/ACP test, the employer may be required to make additional contributions to the plan in order to correct the discrimination.

The ADP/ACP test is one of several non-discrimination tests that are used to ensure that 401(k) plans are fair to all employees. Other non-discrimination tests include the Top-Heavy Test and the 401(k) Plan Participation Test.

The ADP/ACP test is a complex test, and employers should consult with a qualified tax advisor to ensure that their plan is in compliance with the law.