Glossary term
Actual Contribution Percentage (ACP) Test
The Actual Contribution Percentage test is a 401(k) nondiscrimination test that compares matching and after-tax employee contributions for highly compensated and non-highly compensated employees.
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What Is the Actual Contribution Percentage Test?
The Actual Contribution Percentage test, or ACP test, is a 401(k) nondiscrimination test that compares certain contribution rates for highly compensated employees with those for non-highly compensated employees. It generally focuses on employer matching contributions and employee after-tax contributions.
The test exists because tax-qualified retirement plans are not supposed to disproportionately benefit owners, executives, or other highly compensated employees. If the plan fails, the employer may need to correct the failure through refunds, additional contributions, or another approved correction method.
Key Takeaways
- The ACP test applies to matching contributions and employee after-tax contributions in many 401(k) plans.
- It compares contribution percentages for highly compensated employees and non-highly compensated employees.
- Safe harbor plan designs can reduce or eliminate the need for annual ACP testing in some cases.
- Failed tests can lead to corrective distributions, employer contributions, or plan design changes.
Which Contributions It Tests
The ACP test is separate from the ADP test. ADP testing focuses on employee elective deferrals. ACP testing focuses on matching contributions and certain after-tax employee contributions. A plan can pass one test and fail the other.
For employees, the test may show up indirectly. A highly compensated employee may receive a refund or reduced benefit if the plan fails and the employer chooses that correction method. Non-highly compensated employees may see employer contributions used as a correction if the employer chooses to raise their tested percentages instead.
Test | Main Contributions Reviewed | Typical Concern |
|---|---|---|
ADP test | Pre-tax and Roth elective deferrals | Whether salary deferrals are too concentrated among HCEs. |
ACP test | Matching and employee after-tax contributions | Whether matching or after-tax contributions favor HCEs too heavily. |
Plan Design Consequences
Employers that repeatedly fail ACP testing may adjust match formulas, encourage broader participation, add safe harbor contributions, limit after-tax contributions, or change plan communication. The issue is not only technical compliance. Failed testing can frustrate highly compensated employees and make the plan less predictable.
Because testing rules are detailed, employers normally rely on recordkeepers, third-party administrators, and benefits counsel to calculate and correct results.
The Bottom Line
The ACP test is a 401(k) fairness test for matching and after-tax contributions. It helps keep tax-favored plan benefits from flowing too heavily to highly compensated employees, but it also makes plan design and participation rates financially important.