Question

Which of the following are true of the actual contribution percentage test (ACP) test for 401(k) plans?

A) The ACP test is not used unless a 401(k) plan has a match or allows employee after-tax contributions.
B) The ACP test uses the same two test structure and percentage rules as the ADP test.
C) The ADP test accounts only for employee deferrals. The ACP test accounts for employer matching and after-tax contributions, but not pretax contributions and elective deferrals.
D) If the ADP of the non-highly compensated employees is greater than 2% but less than or equal to 8%, then the maximum ADP of the highly compensated employees is 2% more than the ADP of the non-highly compensated employees.

Answer 1

The ACP test for 401(k) plans applies to match and after-tax contributions. It shares a structural similarity with the ADP test but targets different contributions. The test is crucial in ensuring that the benefits do not disproportionately favor highly compensated employees.

Step-by-step explanation:

Actual Contribution Percentage (ACP) Test for 401(k) Plans

The actual contribution percentage (ACP) test is a nondiscrimination test that applies to 401(k) plans. The assertions provided in the question pertain to various components of the ACP test. Here are the correct responses based on the options given:

true: The ACP test is indeed not used unless a 401(k) plan has a match or permits employee after-tax contributions.

false: While the ACP test shares a similar structure to the Actual Deferral Percentage (ADP) test, there are differences in what they cover and the specifics of their testing methodology.

true: The ACP test focuses on employer matching and after-tax employee contributions, whereas the ADP test is concerned with pretax employee contributions and elective deferrals.

false: The statement provided is inaccurate for the ACP test and instead describes part of the ADP test structure which has implications for permitting higher contributions from highly compensated employees (HCEs) based on the participation of non-highly compensated employees (NHCEs).

These retirement plans are advantageous as they are tax deferred and portable, allowing retirees to potentially achieve real rates of return that can help prevent inflation erosion of their benefits.