Non-discrimination testing (ADP/ACP testing) is an annual compliance requirement for certain 401(k) plans. Its purpose is to ensure that a company’s 401(k) plan does not disproportionately benefit highly compensated employees (HCEs) over non-highly compensated employees (NHCEs), helping to maintain fairness and compliance under ERISA regulations.

What Does Non-Discrimination Testing Measure?

There are two main tests:

  • ADP (Average Deferral Percentage) Test – Evaluates employee salary deferrals
  • ACP (Average Contribution Percentage) Test – Evaluates employer matching contributions

Under ERISA, the contribution rates of HCEs must be limited based on the contribution behavior of NHCEs.

Who Is Subject to Non-Discrimination Testing?

Your 401(k) plan is subject to ADP/ACP testing if:

  • It did not adopt a Safe Harbor provision for the plan year, or

  • It removed Safe Harbor provisions during the year, and

  • Employees made pre-tax or Roth deferrals and/or received discretionary employer match contributions

If your plan functioned under a Safe Harbor provision for the full year, it is exempt from ADP/ACP testing.

Testing is generally performed after the end of the year, typically starting in February.

 

How Does the Testing Work?

Plans can use one of two methods for calculating NHCE contribution rates, based on either current-year or prior-year census data. The selected method is defined in your Adoption Agreement, and switching between methods is subject to IRS restrictions.

Current-Year Testing

  • Uses 2024 NHCE contribution and compensation data

  • Corrective options if the test is failed:

    • Make a Qualified Non-Elective Contribution (QNEC) to eligible NHCEs

    • Issue corrective refunds to HCEs

    • Add a 4% Safe Harbor non-elective contribution for all eligible employees as of December 31, 2024

Prior-Year Testing

  • Uses 2023 NHCE contribution and compensation data to determine allowable HCE contributions for 2024

  • Benefits:

    • Employers can pre-determine HCE contribution limits based on prior-year NHCE data

    • Reduces the risk of failing the test

  • Corrective options:

    • Issue corrective refunds to HCEs

    • Add a 4% Safe Harbor non-elective contribution for all eligible employees as of December 31, 2024

 Key Note: Plans using prior-year testing know the maximum allowable HCE deferral rates in advance.

 

 Where Can I Find My Plan’s Testing Method?

Your plan’s selected testing method (current or prior year) is outlined in your Adoption Agreement. Contact us if you need help locating or interpreting this information.