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What is the ADP/ACP Test (discrimination testing)?

April 26, 2017ACP ADP discrimination Test Testing

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What is the ADP/ACP Test (discrimination testing)?

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The amount of contributions under a plan must not discriminate in favor of highly compensated employees. The amount of elective contributions under a 401(k) plan is not considered discriminatory if the plan satisfies the actual deferral percentage (ADP) test. Similarly, any employer matching contributions are not discriminatory in amount if the plan meets the actual contribution percentage (ACP) test. The ADP/ACP test holds that the average percentage of pay deferred by the highly compensated employees (HCE) cannot exceed the “adjusted” average percentage of pay deferred by the non-highly compensated employees (NCE). To calculate this adjusted average percent of pay deferred we must first calculate the average deferral percent (DP) for the NCE group. This value is simply the average of all NCE individual deferrals over their individual pays.