Actual Deferral Percentage / Actual Contribution Percentage - ADP/ACP Test
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 Definitions
Articles Of Interest
-
The Basics Of A 401(k) Retirement Plan
This plan has become one of the most popular retirement options. Find out why. -
Payroll Deductions Pay Off
Find out how you can bypass or defer taxes on thousands of dollars each year. -
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. -
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. -
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. -
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. -
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. -
Common Questions About Retirement Plans
We offer some solutions for the individual taxpayer as well as the small business owner. -
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. -
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.
Free Annual Reports