401(k) glossary
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Testing & compliance
ADP and ACP tests
Short definition
The ADP and ACP tests compare what highly compensated employees contribute to a 401(k), and receive in match, with what other employees do. If the gap is too wide, the plan fails and must correct.
What the ADP and ACP tests are
The actual deferral percentage (ADP) test looks at employee deferrals, pre-tax and Roth. The actual contribution percentage (ACP) test looks at employer matching contributions and employee after-tax contributions. Each test averages the rates for two groups, highly compensated employees (HCEs) and non-highly compensated employees (NHCEs), and compares them.
The HCE average passes if it is no more than the greater of:
1.25 times the NHCE average, or
the NHCE average plus 2 percentage points, capped at twice the NHCE average.
NHCE average | Highest passing HCE average |
|---|---|
2% | 4% |
4% | 6% |
9% | 11.25% |
Why it matters to employers
Failures are common at small and mid-sized companies where owners and executives defer the maximum and other employees save little. Correcting a failure means either refunding part of the HCEs’ contributions, which is taxable to them, or making extra fully vested employer contributions (QNECs) for NHCEs.
Deadlines
Refunds made within two and a half months after the plan year ends (March 15 for a calendar-year plan) avoid a 10% employer excise tax. An EACA covering all eligible employees gets six months. The final deadline is 12 months after the plan year ends.
Common mistakes
Misidentifying HCEs, especially family members of owners, who are treated as owners.
Leaving eligible employees who deferred nothing out of the test. They count as zeros.
Using the wrong testing method. The plan document says whether NHCE rates come from the current or prior year.
Forgetting that catch-up contributions are excluded from ADP.
Assuming a safe harbor plan is exempt for after-tax contributions. It is not.
Basic Capital and this term
Basic Capital’s Active Compliance monitors ADP, ACP and top-heavy tests continuously and flags employees enrolled at 0%.
Go deeper
Read the full employer guide related to: ADP and ACP tests
→
Sources
Internal Revenue Service: 401(k) plan fix-it guide: The plan failed the 401(k) ADP and ACP nondiscrimination tests (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests), retrieved 2026-11-11 eCFR (National Archives): 26 CFR 1.401(k)-2: ADP test (https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.401(k)-2), retrieved 2026-11-11 eCFR (National Archives): 26 CFR 1.401(m)-2: ACP test (https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.401(m)-2), retrieved 2026-11-11 Internal Revenue Service: Retirement plans definitions (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-plans-definitions), retrieved 2026-11-11
General information, not legal or tax advice.
