3807 / How is the actual contribution percentage (ACP) calculated in determining whether the ACP test is satisfied?

The ACP for a group of eligible employees is the average of their actual contribution ratios (“ACRs”) for the year, computed separately for each employee and to the nearest one-hundredth of one percent. An employee’s ACR is (1) the sum of matching contributions and employee contributions (including any QNECs taken into account) divided by (2) the employee’s compensation ( Q 3891).¹ Special rules apply for the first year a plan, other than a successor plan, is in existence.²

Compensation for this purpose generally is the same as under IRC Section 414(s) ( Q 3867), based on the plan year or the calendar year ending within the plan year; the period selected must be applied uniformly for every eligible employee under the plan.³

A matching contribution is (1) any employer contribution, including a discretionary contribution, to a defined contribution plan on account of an employee contribution to a plan maintained by the employer, (2) any employer contribution, including a discretionary contribution, to a defined contribution plan on account of an elective deferral ( Q 3760),⁴ and (3) any forfeiture allocated on the basis of employee contributions, matching contributions, or elective contributions.⁵

For purposes of the ACP test, employee contributions generally are contributions that are designated or treated at the time of contribution as after-tax employee contributions, and are allocated to an individual account for each eligible employee.⁶

Matching contributions are taken into account for a plan year only if such contributions are (1) allocated to the employee’s account under the terms of the plan as of a date within the plan year, (2) made on behalf of an employee on account of the employee’s contributions (elective or otherwise) for the plan year, and (3) actually paid to the trust no later than the end of the 12 month period immediately following the close of the plan year.⁷

Matching contributions that do not satisfy these requirements may not be considered in applying the ACP test for any plan year, but instead must meet the general test for the nondiscriminatory amount requirement ( Q 3848) by treating them as if they were nonelective contributions and were the only nonelective employer contributions for the year.⁸

An eligible employee generally is any employee who is directly or indirectly eligible to make a contribution or to receive a matching contribution (including those derived from forfeitures) for all or a portion of the plan year. Employees who would be eligible to make contributions were it not for a suspension or an election not to participate also are considered eligible.⁹

Under a special rule for early participation, a plan that separately satisfies the minimum coverage rules ( Q 3842), taking into account only those employees who have not completed one year of service or are under age 21, may ignore, for purposes of the ACP test, eligible nonhighly compensated employees who have not met the age and service requirements in applying the ACP test.¹⁰ This provision is designed to encourage employers to include younger employees in the plan without the concern that they will “pull down” the ACP test results.

Although a plan must, by its terms, provide that the ACP test will be met, it may incorporate by reference the IRC Section 401(m) nondiscrimination provisions.¹¹