![]() 125% of the ADP for the group of NHCEs, or.The ADP test is met if the ADP for the eligible HCEs doesn't exceed the greater of: Do the same for the HCEs to determine their ADP.Ĭalculate the ACP the same way, instead dividing each participant’s matching and after-tax contributions by the participant's compensation. The average ADR for all eligible NHCEs (even those who chose not to defer) is the ADP for the NHCE group. Dividing a participant’s elective deferrals by the participant’s compensation gives you that participant’s Actual Deferral Ratio (ADR). ![]() The ADP test counts elective deferrals (both pre-tax and Roth deferrals, but not catch-up contributions) of the HCEs and NHCEs. These nondiscrimination tests for 401(k) plans are called the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. As the NHCEs save more for retirement, the rules allow HCEs to defer more. Plan sponsors must test traditional 401(k) plans each year to ensure that the contributions made by and for rank-and-file employees (nonhighly compensated employees (NHCE)) are proportional to contributions made for owners and managers (highly compensated employees (HCE)). Communicate with plan administrators to ensure proper employee classification and compliance with the plan terms. Make qualified nonelective contributions for the nonhighly compensated employees.Ĭonsider a safe harbor plan design or using automatic enrollment. The plan failed the 401(k) ADP and ACP nondiscrimination tests.Ĭonduct an independent review to determine if highly compensated and nonhighly compensated employees are properly classified.
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