What is the Actual Deferral Percentage (ADP) test?
The Actual Deferral Percentage (ADP) test is an annual compliance test applicable to 401(k) plans (other than Safe Harbor 401(k) plans). The ADP test compares the average deferral ratios of highly compensated employees (HCEs) to the average deferral ratios of the non-highly compensated employees (NHCEs). A participant’s “deferral ratio” is the amount of his 401(k) salary deferrals for the current year divided by the amount of his compensation for the current year. In order to pass the ADP test, the law requires that the average of the HCE deferral ratios does not exceed the average of the NHCE deferral ratios by more that a specified amount. Such specified amount is calculated on a year-to-year basis and varies from one plan to another.
