What are ADP/ACP Tests?
The ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) tests compare the average of salary deferral and employer match percentages for highly compensated employees (HCE) to the average of salary deferral and employer match percentages for non-highly compensated employees (NHCE). HCE’s include anyone who owns more than 5% of the company, the spouse, children, parents and grandparents of a 5% owner, or anyone who received more than $100,000 (indexed) in gross compensation from the employer in the previous year. There is no minimum income required for a 5% owner or family member to be classified as an HCE. For example, they could earn only $1,000 and still be classified as an HCE. To perform the ADP test, a salary deferral percentage is calculated for every eligible employee. The numerator is the amount of salary deferred by the employee. The denominator is the employee’s pay before salary deferral. The employees are then grouped into HCE’s and NHCE’s. The percentag
The ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) tests compare the average of salary deferral and employer match percentages (if any) of highly compensated employees (HCE) to the average of salary deferral and employer match percentages of non-highly compensated employees (NHCE). Eligible participants who did not contribute to the plan are included as zeros. HCE’s include anyone who owns more than 5% of the company (regardless of income), the spouse, children, grandchildren or parents of a 5% owner, or anyone who received more than $90,000 in gross compensation from the employer in the previous year. If the plan fails these tests, corrections must be made by one of two methods: additional employer contributions, or refunds of contributions to HCEs. The Plan Administrator is responsible for deciding which method is to be used to correct the test.
