401(k) glossary
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Testing & compliance
Nondiscrimination testing
Short definition
Nondiscrimination testing is the set of annual IRS tests that check a 401(k) plan does not favor owners and highly paid employees over everyone else. The main tests are ADP, ACP, coverage and top-heavy.
What nondiscrimination testing is
A 401(k) gets its tax advantages on the condition that it benefits employees broadly. Each plan year the plan has to prove that with a set of tests:
Test | What it checks |
|---|---|
ADP (actual deferral percentage) | Deferral rates of highly compensated employees (HCEs) against everyone else |
ACP (actual contribution percentage) | The same comparison for employer match and after-tax contributions |
Coverage (section 410(b)) | Whether enough non-HCEs are eligible for the plan |
Top-heavy | Whether key employees hold more than 60% of plan assets |
Annual limits | Deferral, annual additions and compensation limits for each person |
Your recordkeeper or third-party administrator (TPA) usually runs the tests after year end using the census data you send.
Why it matters to employers
A failed test has to be fixed. The usual fixes are refunds to HCEs or an extra employer contribution for other employees. Leaving a failure uncorrected puts the plan’s tax-qualified status at risk. Plan design can remove much of the exposure: a safe harbor 401(k) is deemed to pass ADP and ACP, and automatic enrollment raises participation among the employees the tests protect.
Example
For 2026, an HCE is generally someone who owned more than 5% of the company in 2025 or 2026, or who earned more than $160,000 from you in 2025. If your non-HCEs defer 3% of pay on average, your HCEs as a group can average no more than 5%.
Common mistakes
Sending incomplete census data: missing part-timers, terminated employees, ownership or family relationships.
Leaving out related companies that belong in the same controlled group.
Testing too late. ADP and ACP refunds made more than two and a half months after year end generally cost the employer a 10% excise tax.
Assuming safe harbor status exempts every contribution type.
Basic Capital and this term
Basic Capital’s Active Compliance monitors ADP, ACP and top-heavy tests continuously, and Basic Capital handles compliance testing.
Go deeper
Read the full employer guide related to: Nondiscrimination testing
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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 Internal Revenue Service: Is my 401(k) top-heavy? (https://www.irs.gov/retirement-plans/is-my-401k-top-heavy), retrieved 2026-11-11 Internal Revenue Service: A guide to common qualified plan requirements (https://www.irs.gov/retirement-plans/a-guide-to-common-qualified-plan-requirements), retrieved 2026-11-11 Internal Revenue Service: Notice 2025-67: 2026 amounts relating to retirement plans and IRAs (https://www.irs.gov/pub/irs-drop/n-25-67.pdf), retrieved 2026-11-11 U.S. Code (govinfo.gov): 26 U.S.C. 410: Minimum participation standards (https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapD-partI-subpartB-sec410.htm), retrieved 2026-11-11
General information, not legal or tax advice.
