Actual Deferral Percentage / Actual Contribution Percentage - ADP/ACP Test

AAA

DEFINITION of 'Actual Deferral Percentage / Actual Contribution Percentage - ADP/ACP Test'

Annual non-discrimination tests for 401(k) plans mandated by the IRS to ensure that a plan does not unduly benefit owners and highly compensated employees at the expense of other employees. The Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests must be passed in order to satisfy the non-discrimination requirements of the IRS if the plan is to continue.


If the plan fails either test, the employer must take corrective action to protect its qualified status in the 12-month period following the close of the plan year in which the oversight occurred.

INVESTOPEDIA EXPLAINS 'Actual Deferral Percentage / Actual Contribution Percentage - ADP/ACP Test'

The ADP test compares the average salary deferral - as a percentage of pre-tax compensation - of highly compensated employees (HCE) to that of non-highly compensated employees (NHCE). To pass the test, the ADP of the HCE may not exceed the ADP of the NHCE by a factor of 1.25 or 2 percentage points.
The ACP test uses a similar method as the ADP test, except that it uses matching contributions and/or employee after-tax contributions.


Some companies use a Safe Harbor 401(K) plans to avoid the ADP/ACP test entirely.

RELATED TERMS
  1. Highly Compensated Employee

    For employer-sponsored, tax-advantaged retirement plan purposes, ...
  2. Qualified Retirement Plan

    A plan that meets requirements of the Internal Revenue Code and ...
  3. Elective-Deferral Contribution

    A contribution arrangement of an employer-sponsored retirement ...
  4. Matching Contribution

    A type of contribution an employer chooses to make to his or ...
  5. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  6. Safe Harbor

    1. A legal provision to reduce or eliminate liability as long ...
RELATED FAQS
  1. How do gains from my 401(k) figure into my taxable income?

    Capital gains from a 401(k) account figure into taxable income in that capital gains are taxed at the ordinary income rate ... Read Full Answer >>
  2. Does my employer's matching contribution count towards the maximum I can contribute ...

    Contributions to 401(k) plans come from employee salary deferral and employer match dollars. According to the IRS, employees ... Read Full Answer >>
  3. How much will an employer generally contribute to a 401(a) plan?

    The amount an employer contributes to an employee's 401(a) retirement savings plan can vary from plan to plan. 401(a) plans ... Read Full Answer >>
  4. When can benefits be received from a provident fund?

    Like most retirement savings vehicles, participants in provident funds are eligible to receive benefits at retirement. However, ... Read Full Answer >>
  5. Is Social Security Income a perpetuity?

    Because Social Security income does not continue indefinitely, it cannot be classified as a perpetuity. What Is a Perpetuity? A ... Read Full Answer >>
  6. What types of investments are allowed in a provident fund?

    Different provident funds have different investment rules and restrictions. The allowable investments in an Indian provident ... Read Full Answer >>
Related Articles
  1. Retirement

    3 Reasons To Use An Employer-Sponsored Retirement Plan

    If you aren't participating in your employer-sponsored retirement plan, you're missing out! Learn the benefits.
  2. Savings

    3 Common Excuses For Not Contributing To A Retirement Plan

    If you're not participating in your employer-sponsored retirement plan, there may be some easy solutions.
  3. Retirement

    Payroll Deductions Pay Off

    Find out how you can bypass or defer taxes on thousands of dollars each year.
  4. Taxes

    The Basics Of A 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Find out why.
  5. Retirement

    Introduction To SIMPLE 401(k) Plans

    Learn about the features and benefits of the plan that is a cross between a SIMPLE IRA and a traditional 401(k) plan.
  6. Options & Futures

    When Your Employer Cuts Your 401(k) Match

    In hard times, companies may stop matching your 401(k) contribution, but there are ways to offset the hit.
  7. Retirement

    6 Ways To Maximize The Value Of Your 401(k)

    From matching employer contributions to proper asset allocation, we'll tell you how to get the most out of your plan.
  8. Retirement

    A Closer Look At The Roth 401(k)

    Learn about the benefits and drawbacks of this new investment account and see if it's right for you.
  9. Entrepreneurship

    401(k) Plans For The Small Business Owner

    If you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements.
  10. Taxes

    Common Questions About Retirement Plans

    We offer some solutions for the individual taxpayer as well as the small business owner.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!