401(k) Plan Testing Definition
401(k) plan testing refers to the tests carried out to ensure the nondiscriminatory nature of the defined contribution retirement savings plans.
401(k) Plan Testing Extended Definition
401(k) plans are a means to help people, particularly those belonging to lower and middle-income groups, save for retirement. As a result, the IRS established nondiscrimination rules to ensure the plans do not favor HCEs (highly compensated employees) over NHCEs (non-highly compensated employees).
Plan sponsors must verify plans are fair and proportional by conducting annual nondiscrimination tests for traditional 401(k) plans.
Nondiscrimination tests include:
- Actual Deferral Percentage (ADP)
- Actual Contribution Percentage (ACP)
Both tests involve math. To conduct the ADP or ACP test, follow the IRS calculation processes. If you sign up for payroll software with seamless 401(k) integration, the 401(k) plan sponsor conducts the annual testing process.
Last Updated By
Rachel Blakely-Gray | Feb 14, 2023