What is the ADP/ACP Test?

The Internal Revenue Service (IRS) requires all 401(k) plans to be tested annually. The testing fulfills several key purposes. One test is the ADP/ACP test, which stands for actual deferral percentage/actual contribution percentage.

The purpose of the test is to determine whether all participants are benefiting equitably from the plan. Other tests are designed to ensure that participants are not exceeding the contributions limits allowed by the IRS. There are several required tests for every plan.

Due to the complexity of the tests, they are usually completed by an outside company rather than the company sponsoring the plan. Similar to tax filing deadlines, each test has an annual filing deadline. The filing deadline for the ADP/ACP test is 15 March.

Failure to meet the filing deadline can cause a plan to incur stiff penalties, including disqualification of the plan. The ADP/ACP test is one of the more significant tests, because most 401(k) plans have to address its consequences or ... more.

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