ADP/ACP Testing

Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) are the most frequent compliant tests being performed in 401(k) Plans.

ADP is testing 401(k) deferrals among highly and non-highly participants, and the second separate test (ACP) applies when there are after-tax or employer matching contributions. The testing has gotten easier to pass.

Items to Pass ADP/ACP testing


  • HCE limit their dollar and/or percentage based upon prior year NHCE %
  • Perform testing and make returns, as needed
  • Employer makes a qualified non-elective contribution to boost the NHCE ADP/ACP
  • Automatic enrollment at a minimum percentage or Employer adopts a Safe-Harbor 401(k) Plan – e.g. deemed to satisfy
  • Adjust matching formula to encourage higher participation

Testing Validation:

  • Carefully Identify HCEs;
  • Check to see if the Plan can make a Top 20% HCE Election;
  • Check for otherwise excludable employees;
  • Confirm contributions pertain to the testing period;
  • Check compensation definition; and
  • Check employee census information.

Pass/Fail Testing Review:

  • Does the testing include all eligible participants, even those electing 0%?
  • Is the correct definition of Compensation being used?
  • Do the Contributions being tested equal the testing period, generally the 12-month plan year?
  • Is the matching contribution, if any, being calculated correctly?
  • Do you agree with the Highly Compensated Employee designation?
  • If you are using Prior Year NHCE ADP/ACP, are the percentages correct?
  • Do you need to take Corrective Action?
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