ACP Test (Actual Contribution Percentage)
The ACP Test (Actual Contribution Percentage) is a mandatory non-discrimination test used in employer-sponsored retirement plans to ensure fairness in how benefits are distributed. For HR leaders and finance teams, failing this test can mean refunds, penalties, and frustrated employees making ACP compliance a critical but often underestimated responsibility in retirement plan administration.
TL;DR
- ACP Test (Actual Contribution Percentage) checks fairness in employer matching and after-tax contributions
- Compares Highly Compensated Employees (HCEs) with Non-Highly Compensated Employees (NHCEs)
- Applies mainly to 401(k) and similar defined contribution plans
- Failing the test requires corrective actions like refunds or extra contributions
- Strong plan design and employee participation help ensure ACP compliance
What Is the ACP Test (Actual Contribution Percentage)?
The ACP Test (Actual Contribution Percentage) is an IRS-mandated compliance test designed to ensure that employer-sponsored retirement plans do not unfairly favor higher-paid employees. Specifically, it measures whether employer matching contributions and after-tax employee contributions are distributed equitably between HCEs and NHCEs.
From an HR and compliance perspective, the ACP Test protects lower-paid employees by preventing retirement plans from becoming exclusive wealth-building tools for senior leadership. It reinforces the principle that retirement benefits should be accessible and balanced across the workforce.
Unlike contribution limits that apply individually, the ACP Test evaluates group averages, making participation levels and contribution behavior across the organization critically important.
Why Is the ACP Test Important for Organizations?
The ACP Test (Actual Contribution Percentage) plays a central role in maintaining regulatory compliance and employee trust.
Ensures Fairness and Equity
At its core, the ACP Test ensures that employer matches do not disproportionately benefit HCEs. This fairness strengthens employer credibility and reinforces ethical compensation practices.
Protects Tax-Qualified Status
Retirement plans that repeatedly fail the ACP Test risk losing their tax-advantaged status. For organizations, this can lead to legal exposure, financial penalties, and reputational damage.
Impacts Employee Experience
Corrective actions such as refunding excess contributions to senior employees can negatively affect morale if not communicated carefully. Proactive ACP compliance avoids these uncomfortable scenarios.
Pro Tip: Retirement plans with higher NHCE participation rates are far more likely to pass the ACP Test consistently.
How Does the ACP Test Work?
The ACP Test (Actual Contribution Percentage) compares the average contribution rates of two employee groups.
Step 1: Identify Employee Groups
- Highly Compensated Employees (HCEs): Typically owners or employees earning above a defined compensation threshold
- Non-Highly Compensated Employees (NHCEs): All other eligible employees
Step 2: Calculate Contribution Percentages
For each group, the plan calculates the average percentage of compensation contributed through:
- Employer matching contributions
- After-tax employee contributions
Step 3: Compare the Averages
The HCE group's average cannot exceed the NHCE group's average by more than the limits allowed under IRS rules. If it does, the plan fails the ACP Test.
This structure ensures that employer generosity benefits the workforce broadly, not just top earners.
ACP Test vs ADP Test: What's the Difference?
Although often discussed together, the ACP Test and ADP Test serve different purposes.
| Aspect | ACP Test | ADP Test |
|---|---|---|
| Full Form | Actual Contribution Percentage | Actual Deferral Percentage |
| Focus | Employer match & after-tax contributions | Employee salary deferrals |
| Goal | Fair distribution of employer benefits | Fair employee participation |
| Applies To | Matching & after-tax amounts | Pre-tax & Roth deferrals |
Both tests work together to ensure holistic retirement plan fairness. Passing one does not guarantee passing the other.
What Happens If a Plan Fails the ACP Test?
Failing the ACP Test (Actual Contribution Percentage) does not mean the plan is invalid but it does require corrective action.
Common Correction Methods
- Refund excess contributions to HCEs (taxable and often unpopular)
- Make additional employer contributions to NHCEs
- Recharacterize contributions where allowed
Each correction method has cost, tax, and employee relations implications. HR teams must act within strict deadlines to avoid further penalties.
Business Impact
Repeated failures signal poor plan design or low employee engagement. Over time, this can undermine the value of the retirement benefit itself.
How HR Teams Can Improve ACP Test Results
Increase NHCE Participation
Auto-enrollment, clear communication, and financial wellness education encourage broader participation raising NHCE averages.
Review Matching Formulas
Shifting from aggressive top-heavy matching to more balanced formulas improves ACP outcomes without increasing total cost.
Consider Safe Harbor Designs
Safe Harbor plans automatically bypass ACP testing by meeting predefined contribution requirements, reducing administrative burden.
Use Data-Driven Monitoring
Tracking contributions throughout the year allows HR to spot potential ACP issues early before corrective action becomes expensive.
Strategic Value of the ACP Test for Leadership
For C-suite leaders, the ACP Test (Actual Contribution Percentage) is more than a compliance checkbox. It reflects how equitably the organization invests in its people. Strong ACP outcomes signal:
- Fair compensation philosophy
- Inclusive benefits strategy
- Mature governance and risk management
When handled proactively, ACP compliance becomes a trust-building mechanism rather than a regulatory headache.
Managing retirement compliance manually is risky. Qandle's HRMS helps HR teams track compensation data, payroll accuracy
FAQ's
1. Is the ACP Test required every year?
Yes. The ACP Test must be performed annually for applicable retirement plans.
2. Does every retirement plan need an ACP Test?
No. Safe Harbor plans are generally exempt from ACP testing.
3. What contributions are included in the ACP Test?
Employer matching contributions and employee after-tax contributions.
4. Who is considered a Highly Compensated Employee?
Typically owners or employees earning above a government-defined threshold or owning a significant stake.
5. Can a failed ACP Test be corrected?
Yes, but corrections must be made within strict timelines to avoid penalties.
6. How can companies avoid failing the ACP Test?
By increasing NHCE participation, adjusting match formulas, or adopting a Safe Harbor plan.
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