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What is a failed ADP/ACP test and how does it affect my 401(k)?

Retirement & 401(k)intermediate3 answers · 5 min readUpdated February 28, 2026

Quick Answer

A failed ADP/ACP test means highly compensated employees contributed too much relative to other workers. The IRS requires refunding excess contributions to high earners by March 15th, potentially reducing their retirement savings by $5,000-$15,000 annually.

Best Answer

SC

Sarah Chen, CPA

Highly compensated employees (HCEs) who are most likely affected by failed nondiscrimination tests

Top Answer

What are ADP and ACP tests?


The Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests ensure 401(k) plans don't unfairly favor highly compensated employees (HCEs). For 2026, you're an HCE if you earned more than $155,000 in 2025 or owned more than 5% of the company.


The tests compare contribution rates between HCEs and non-highly compensated employees (NHCEs). If the gap is too large, the test fails and corrections are required.


How the ADP test works


The ADP test compares employee deferrals (your regular 401(k) contributions):


Safe harbor thresholds:

  • If NHCE average is 2% or less: HCEs can contribute up to 2x that rate
  • If NHCE average is 2-8%: HCEs can contribute NHCE rate + 2%
  • If NHCE average is 8%+: HCEs can contribute up to 1.25x NHCE rate

    • Example: Failed ADP test scenario


    At a 100-person tech company:

  • NHCEs (80 employees): Average contribution rate = 3%
  • HCEs (20 employees): Average contribution rate = 8%
  • Test result: HCEs can only contribute up to 5% (3% + 2%)
  • Excess: 3 percentage points must be refunded


    • How the ACP test works


    The ACP test covers employer matching and after-tax contributions using the same safe harbor rules as ADP. If your company matches 50% of contributions up to 6% of salary, this match is subject to the ACP test.


    What happens when tests fail


    Correction timeline:

  • Tests must be completed by the last day of the plan year
  • Corrections must be made by March 15th of the following year
  • HCEs receive refunds of excess contributions plus earnings

    • Tax implications of refunds:

  • Refunded deferrals are taxed in the year originally contributed
  • Earnings on refunded amounts are taxed in the year distributed
  • You lose the tax-deferred growth on refunded money

    • Strategies to avoid failed tests


    For employees:

  • Contribute to Roth 401(k) instead (still counts toward ADP but you've already paid taxes)
  • Encourage lower-paid colleagues to participate (higher NHCE participation helps)
  • Consider after-tax contributions if available

    • Company-level solutions:

  • Implement safe harbor provisions (auto 3% match or 2% non-elective contribution)
  • Increase employer matching to encourage NHCE participation
  • Offer financial education to boost participation rates

    • What you should do


    If you're an HCE, ask HR about your company's historical test results and whether they have safe harbor provisions. Consider using our paycheck calculator to model different contribution strategies that account for potential refunds.


    Key takeaway: Failed ADP/ACP tests can force high earners to receive $5,000-$15,000 in unexpected refunds, reducing planned retirement savings and creating tax complications.

    *Sources: [IRS Publication 560](https://www.irs.gov/pub/irs-pdf/p560.pdf), IRC Section 401(k)(3)*

    Key Takeaway: Failed nondiscrimination tests can force highly compensated employees to receive significant contribution refunds, reducing retirement savings and creating unexpected tax liabilities.

    Model 401(k) contribution scenarios →

    ADP/ACP test safe harbor thresholds

    NHCE Average RateMaximum HCE RateCalculation Method
    0-2%2x NHCE rateDouble the NHCE average
    2-8%NHCE rate + 2%Add 2 percentage points
    8%+1.25x NHCE rate125% of NHCE average

    More Perspectives

    MR

    Marcus Rivera, CFP

    Older high earners who may be more significantly impacted by contribution refunds

    Why failed tests hit older workers hardest


    If you're approaching retirement and classified as an HCE, failed ADP/ACP tests can significantly derail your final years of retirement savings. The impact is magnified because:


  • You're likely maximizing contributions including catch-up amounts
  • You have fewer years to make up for lost retirement savings
  • The refunds may push you into higher tax brackets
  • You might be counting on specific contribution amounts for retirement planning

    • Real impact on retirement readiness


    Example: 58-year-old executive

  • Planned contribution: $31,000 (including $7,500 catch-up)
  • After failed test refund: $22,000 actual contribution
  • Lost retirement savings: $9,000 annually
  • 7-year impact until retirement: ~$75,000 in lost savings potential

    • Tax complications for pre-retirees


    Receiving a large refund in March can create tax planning nightmares:

  • The refund may push you into the 32% or 37% tax bracket
  • It could trigger higher Medicare premiums (IRMAA)
  • You lose the ability to use that money for current-year tax reduction
  • Required minimum distributions may be affected if you're already 73+

    • Alternative strategies for older HCEs


    1. Maximize Roth contributions: These still count toward ADP limits but you control the tax timing

    2. Consider after-tax contributions: If your plan allows, these aren't subject to ADP testing

    3. Explore mega backdoor Roth: Convert after-tax contributions to Roth for tax-free growth

    4. Delay retirement slightly: Give yourself more time to recover from refunded contributions


    Key takeaway: Pre-retirees face the highest stakes with failed ADP/ACP tests, potentially losing years of catch-up contributions when they can least afford it.

    Key Takeaway: Older highly compensated employees face the greatest retirement impact from failed tests, potentially losing $75,000+ in final retirement savings.

    SC

    Sarah Chen, CPA

    Workers who may not realize they're classified as highly compensated due to combined income

    How multiple jobs affect HCE status


    Many people don't realize that HCE status is determined by your compensation from each individual employer, not your total income. This creates unique situations:


  • Single high-paying job: $180,000 salary = HCE at that company
  • Two moderate jobs: $90,000 each = Not HCE at either company
  • One high, one low: $160,000 + $30,000 = HCE at first company only

    • Different test results at different employers


    Your 401(k) plans are tested separately:


    Company A (where you're an HCE):

  • Your contributions may be limited by failed ADP/ACP tests
  • You could receive refunds reducing retirement savings

    • Company B (where you're not an HCE):

  • No contribution limits from nondiscrimination testing
  • You can contribute up to the annual limit without test-related restrictions

    • Strategy: Maximize contributions at the non-HCE employer


    If you anticipate test failures at your HCE employer:


    1. Contribute more heavily to the plan where you're not an HCE

    2. Front-load contributions early in the year at the safer plan

    3. Reduce contributions at the HCE employer if test failure seems likely

    4. Monitor both plans to stay under the combined $23,500 annual limit


    This approach helps you maximize retirement savings while minimizing refund risk.


    Key takeaway: Multiple job holders can strategically allocate 401(k) contributions between employers to avoid ADP/ACP test limitations while maximizing retirement savings.

    Key Takeaway: Workers with multiple employers can strategically contribute more to plans where they're not highly compensated to avoid test-related refunds.

    Sources

    401kadp testacp testhighly compensated employeenondiscrimination

    Reviewed by Sarah Chen, CPA on February 28, 2026

    This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.