What is ADP and ACP Testing?

ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) testing are two compliance tests that 401(k) plans must undergo each year to ensure they meet the requirements set by the Internal Revenue Service.

The ADP test measures the average contribution percentage of highly compensated employees compared to non-highly compensated employees. The ACP test measures the average matching or non-elective contribution percentage made by the employer to the same groups.

If the ADP or ACP test fails, the plan may be required to take corrective action to avoid violating IRS nondiscrimination rules.

Avoiding the test entirely

A Safe Harbor 401(k) plan eliminates the need for ADP and ACP testing, and for Top Heavy testing, in exchange for a specified employer contribution that is immediately vested.