How is the annual Average Deferral Percentage (ADP) non-discrimination test affected?

Like regular deferrals, Roth 401(k) deferrals will be included when determining each participant’s average deferral rate. Consider the following example from above and assume that the plan’s definition of compensation is gross compensation reported on each employee’s form W-2 (including pre-tax deferrals). John and Sarah each earn $40,000 during 2006 and they each defer $2,000.

John elects to defer to the regular deferral account and Sarah elects to defer to the Roth 401(k) account. John’s average deferral rate is 5% ($2,000 / $40,000). Sarah’s average deferral rate is 5% also ($2,000 / $40,000).

Now consider Paul who also earns $40,000. Paul elected to defer $1,000 to the regular deferral account and $1,000 to the Roth 401(k) account. Paul’s average deferral rate is also 5% ( ($1,000 + $1,000) / $40,000).

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