Definition of Actual Contribution Percentage
Actual Contribution Percentage (ACP) and Actual Deferral Percentage (ADP) tests are two of many nondiscrimination tests that a plan must meet to prove compliance with Internal Revenue Service (IRS) rules. These tests ensure that highly compensated employees and owners are not receiving undue benefits at the expense of other employees. As a result, if either test is not met by the plan, the employer must take corrective actions to maintain its qualified status for twelve months following the end of the plan year in which the noncompliance occurred.
Brief Explanation of Actual Contribution Percentage
The application of ACP and ADP tests involves several steps. For the performance of the ADP test.
- Firslty, find the testing group, which contains all employees who are qualified for the plan. As per the rules, the participants are:
- Anyone qualified to be a participant whether he is actually contributing to the plan or not.
- Divide all participants into two groups: high-compensated employees (HCEs) and non-high-compensated employees (NHCEs).
- Compute the deferral rate for every participant by dividing total salary deferrals by compensation.
- Find the average rate of deferral for the NHCE group and the HCE group.
When the HCE group average falls within a certain range compared to the NHCE group average, the ADP test for the plan passes. Hence, the below-given chart explains the spread in averages of the two groups.
NHCE Average           Maximum HCE Average
- Less than 2% NHCE average x2
- Between 2% and 8% NHCE average +2
