3805 / What is the actual contribution percentage (ACP) test that must be satisfied by defined contribution plans that provide for employee contributions or employer matching contributions?

The IRC provides two methods of applying the ACP test: a prior year testing method, and a current year testing method.¹ The prior year method is specified in the IRC and the current year method is available by election.² A plan generally must specify which of these two methods it is using.³

Prior year testing method. Under the prior year testing method, a defined contribution plan that provides for employee or matching contributions meets the ACP test if the contribution percentage for eligible highly compensated employees for the plan year does not exceed the greater of (1) 125 percent of the contribution percentage for all other eligible employees for the preceding plan year, or (2) the lesser of (i) 200 percent of the contribution percentage for all other eligible employees for the preceding plan year or (ii) such contribution percentage for all other employees for the preceding plan year plus two percentage points.⁴

Current year testing method. Under the current year testing method, the ACP results of nonhighly compensated employees for the current year, also known as the “testing year,” are compared with those of highly compensated employees for the current year. The plan satisfies the ACP test if the contribution percentage for eligible highly compensated employees for the plan year does not exceed the greater of (1) 125 percent of the contribution percentage for all other eligible employees for the plan year or (2) the lesser of (x) 200 percent of the contribution percentage for all other eligible employees for the plan year or (y) such contribution percentage for all other employees for the plan year plus two percentage points.⁵