1. What is the ADP Test?

The ADP (Actual Deferral Percentage) test assesses nondiscrimination in 401(k) contributions between highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). It ensures retirement plans don't disproportionately favor higher-paid employees.

2. How Does the Calculator Work?

The calculator uses the ADP Test formula:

Where:

• \( \text{HCE \%} \) — Percentage for highly compensated employees
• \( \text{NHCE \%} \) — Percentage for non-highly compensated employees
• \( 70\% \) — Minimum pass rate threshold

Explanation: The test compares the deferral percentages of NHCEs to HCEs to ensure fair contribution distribution across employee compensation levels.

3. Importance of ADP Test

Details: The ADP test is required by the IRS for all 401(k) plans to maintain tax-qualified status. Failure to pass can result in plan disqualification, corrective distributions, or other penalties.

4. Using the Calculator

Tips: Enter the HCE percentage and NHCE percentage as decimal values (e.g., 5.25% as 5.25). The calculator will determine if the plan passes the 70% threshold requirement.

5. Frequently Asked Questions (FAQ)

Q1: Who are considered HCEs and NHCEs?
A: HCEs are typically employees who own more than 5% of the business or earned over $135,000 (2024). NHCEs are all other employees.

Q2: What happens if the test fails?
A: Employers must take corrective action, which may include refunding excess contributions to HCEs or making qualified nonelective contributions (QNECs).

Q3: How often should the ADP test be performed?
A: The test must be performed annually, typically within 2.5 months after the plan year ends.

Q4: Are there safe harbor provisions?
A: Yes, plans can avoid ADP testing by meeting safe harbor requirements through employer matching or nonelective contributions.

Q5: What's the difference between ADP and ACP tests?
A: ADP tests employee deferrals, while ACP (Actual Contribution Percentage) tests employer matching and employee after-tax contributions.