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

A plan is not required to use the same method under the ACP test as it uses under the ADP test ( Q 3802), but special rules must be followed if different methods are used.⁶

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Planning Point: Make sure to accurately count highly compensated employees using the family aggregation rules, which treat the spouse, child, grandparent, or parent of a 5 percent owner as a 5 percent owner. Remember that family members may have different last names.⁷

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Changes in Testing Method

Change from current year testing method to prior year testing method. A plan that elects to continue using the current year testing method may be subject to certain restrictions if an employer wants to change to the prior year testing method: one governs the revocability of the election, and a second limits the “double counting” of certain contributions.

The election to use the current year testing method ordinarily will not be revocable except with the permission of the IRS.⁸ Regulations provide for limited circumstances under which a plan will be permitted to change from the current year testing method to the prior year testing method.⁹ A plan that changes from the current year testing method to the prior year testing method also is subject to limitations designed to prevent double counting of certain contributions.¹⁰ Plans using the prior year testing method may change back to the currenth year method for any subsequent testing year.¹¹

Special rules apply in the first plan year; essentially a plan other than a successor plan may designate the ACP of nonhighly compensated employees at 3 percent in the first plan year that the plan uses the prior year testing method. The employer may elect to use the plan’s first year ACP results instead.¹² The plan document must specify the method that will be
used.¹³

Miscellaneous Rules

Plans that accept rollover contributions generally assume the risk that the contributions qualify for rollover treatment ( Q 3996). The IRS has determined that where a plan accepted a rollover contribution that, in fact, did not qualify for rollover, the amount involved was received by the plan as a voluntary employee contribution, which had to be considered for purposes of the ACP test.¹⁴

Matching contributions, other than QMACs ( Q 3802), on behalf of self-employed individuals are not treated as an elective employer contribution for purposes of the limit on elective deferrals under IRC Section 402(g).¹⁵

See Q 3806 for information on qualified nonelective contributions (QNECs) and Q 3807 for information on calculating the actual contribution percentage.