What is 401(k) Plan Testing?

401(k) plan testing refers to the annual evaluation of a company's 401(k) plan to ensure it complies with IRS regulations and does not unfairly benefit highly compensated employees.

The two main types of tests are the ADP (Actual Deferral Percentage) test and the ACP (Actual Contribution Percentage) test, which assess the amount of contributions made by HCEs and non-HCEs. If the plan fails the tests, corrective actions may need to be taken, such as returning excess contributions or providing additional benefits to non-HCEs.

Top Heavy testing

In addition to ADP and ACP testing, Traditional and Roth 401(k) plans are also subject to Top Heavy testing. A plan is Top Heavy for a plan year if, at the end of the preceding year, the total value of account balances of Key Employees was more than 60% of the total value of the plan.

If the plan is determined to be Top Heavy and is funded by a Key Employee, the employer is required to make a minimum contribution of 3% to all non-key employees who are employed on the last day of the plan year.