One way avoid ADP and ACP testing is to adopt a Safe Harbor plan. The plain becomes exempt from the tests in exchange for regular contributions to all eligible employees. If we run that 5% number through the formulas above, we see that the most the HCE’s can contribute is an average 7%, not 12.3%. So even passing these tests can frustrate HCEs trying to sock away money for retirement. A plan is top-heavy if key employees account for more than 60% of plan assets. Want to learn more about how a safe harbor plan could benefit your business and your employees?

Actual Deferral & Actual Contribution Percentage Tests Definition your 401k retirement plan allows your employees to save the maximum amount allowed by understanding and utilizing ADP/ACP testing. Educating employees on the importance of saving for retirement can encourage NHCEs to increase their contribution rate and help narrow the gap between NHCE and HCE contribution rates. At Human Interest, we’ve built education for employees into our plans—including resources on our approach to building investment lineups—as well as promoting retirement saving with nudges that drive better decisions.

What Are the Nondiscrimination Tests?

https://adprun.net/ may move from the HCE group to the NHCE group in different plan years, so this classification is determined annually. Coverage testing is meant to focus on whether a plan is discriminating with regard to who is “benefitting” under the plan. For example, you can’t have a stand alone plan where you allow only HCE’s to benefit.

• If a plan is more generous, some shorter service employees who become eligible often choose not to contribute, which hurts the test results.
• Employees who are eligible but do not contribute must be also included, and they are figured into the average with a 0%.
• One way avoid ADP and ACP testing is to adopt a Safe Harbor plan.
• Failing any of the four non-discrimination tests requires the plan to make a correction.
• Whether you’re a small business starting your first 401 plan or a larger business looking to save costs and increase your service, we’re here to serve you.

Reynolds agrees with Droblyen’s tactics to avoid failing testing and explains that there are corrective measures for plan sponsors that don’t pass the test. “By failing a test, the HCE average is just higher than the non-highly compensated employee average by more than the allowable amount, so it just boiled down to deferral rate,” Droblyen adds. Many plans with a safe harbor that don’t include automatic enrollment also failed top-heavy testing, says Droblyen. The enhanced safe harbor, which also requires employees to contribute to the plan, must be at least as generous as the basic match. A common formula is a 100% match on the first 4% of deferred compensation.

What Is the Actual Deferral Percentage Test?

Calculate the deferral rate for each participant by dividing his or her total salary deferrals (including both pre-tax and Roth) by his or her compensation. Plan Compliance We have a fundamental understanding of how critical plan compliance is to both the IRS and Department of Labor. Defined Benefits Services We work with business owners and investment advisors to determine what makes the most sense by providing a detailed cost benefit analysis. Mergers, Aquisitions & Related Company Analysis The DWC team is well-versed enough in the nuances and is ready to help you navigate the situation.

The ACP test includes the employer match contributions, employee voluntary after-tax contributions and certain forfeitures allocated on the basis of deferrals or matching contributions. ¹ Making a profit sharing contribution in addition to your safe harbor contribution could cause your plan to become top heavy. This may require additional employer contributions to the plan.