Quick Answer
ADP/ACP tests ensure 401(k) plans don't favor highly compensated employees (those earning $155,000+ in 2026). When tests fail, excess contributions must be distributed to high earners, typically by March 15. Failed tests affect roughly 15-20% of 401(k) plans annually, with high earners receiving unexpected taxable distributions.
Best Answer
Sarah Chen, Payroll Tax Analyst
Best for highly compensated employees (HCEs) who may be affected by failed nondiscrimination tests
What are ADP and ACP tests?
The Average Deferral Percentage (ADP) and Average Contribution Percentage (ACP) tests are annual IRS requirements that ensure 401(k) benefits don't disproportionately 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.
These tests compare contribution rates between HCEs and non-highly compensated employees (NHCEs). When the gap is too large, the test fails.
How the tests work
ADP Test: Compares salary deferral percentages (your 401(k) contributions as a percentage of pay)
ACP Test: Compares employer matching and after-tax contribution percentages
For most plans, HCE contribution rates cannot exceed NHCE rates by more than 2 percentage points, or 125% of the NHCE rate (whichever is greater).
Example: Failed ADP test scenario
TechCorp's 2026 results:
Correction methods and your impact
When tests fail, plans have several correction options, but the most common affects high earners directly:
Distribution method (most common)
Excess contributions are distributed back to HCEs, typically starting with the highest earners.
Example correction:
John, VP earning $300,000, contributed 15% ($45,000) to his 401(k). After the failed test, he must receive a distribution of $9,000 plus earnings to bring his effective rate down to 12%.
Timeline and tax implications
Strategies to minimize impact
Monitor your contribution rate: If you're contributing much more than 6-8% as an HCE, you're at higher risk for corrections.
Front-load carefully: Contributing heavily early in the year increases your risk if the test fails, since you can't "un-contribute" money already invested.
Consider Roth contributions: Some plans allow you to designate excess distributions as Roth conversions, spreading the tax impact.
Advocate for plan improvements: Encourage your employer to implement auto-enrollment, matching improvements, or safe harbor provisions that can help pass tests.
Safe harbor plans
Some employers adopt "safe harbor" 401(k) designs that automatically pass nondiscrimination tests by providing minimum matching or non-elective contributions to all employees. If your plan is safe harbor, you're not subject to these testing restrictions.
What you should do
1. Ask HR if your plan is subject to ADP/ACP testing or if it's safe harbor
2. Track participation rates among your colleagues — low participation increases failure risk
3. Plan for potential corrections by keeping some cash available for unexpected tax bills
4. Model different contribution strategies with our paycheck calculator to balance tax benefits with correction risk
[Calculate optimal contribution rates considering testing risk →](paycheck-calculator)
Key takeaway: HCEs earning $155,000+ face potential forced 401(k) distributions when nondiscrimination tests fail, creating unexpected taxable income typically distributed by March 15 of the following year.
*Sources: IRS Publication 560, IRC Section 401(a)(4)*
Key Takeaway: HCEs earning $155,000+ face potential forced 401(k) distributions when nondiscrimination tests fail, creating unexpected taxable income typically distributed by March 15 of the following year.
Timeline and impact of failed ADP/ACP tests on highly compensated employees
| Month | What Happens | Your Impact |
|---|---|---|
| Jan-Mar | Plan calculates test results | None yet |
| Mar-Jun | Plan determines correction needed | Possible notification |
| Jul-Mar (next year) | Excess distributions processed | Taxable income |
More Perspectives
Marcus Rivera, Compensation & Benefits Analyst
Best for senior employees who may be both highly compensated and close to retirement
Pre-retirement considerations for failed tests
If you're within 5-10 years of retirement and classified as an HCE, failed nondiscrimination tests can disrupt your retirement planning in several ways.
Impact on catch-up contributions
Employees 50+ can normally contribute an extra $7,500 in catch-up contributions ($31,000 total for 2026). However, if ADP tests fail, your catch-up contributions may be the first to be distributed back to you.
Example: Margaret, age 58, contributed the full $31,000 including $7,500 in catch-up. After a failed test, she received a $4,000 distribution — wiping out more than half her catch-up contribution and forcing her to pay taxes on money she thought was sheltered.
Retirement timing complications
Failed tests can affect retirement planning because:
Planning strategies
Consider contributing to IRAs, Roth IRAs, or taxable accounts as backup retirement savings that aren't subject to nondiscrimination testing.
Key takeaway: Pre-retirees should diversify retirement savings beyond 401(k)s since nondiscrimination test failures can force unwanted distributions and tax consequences near retirement.
Key Takeaway: Pre-retirees should diversify retirement savings beyond 401(k)s since nondiscrimination test failures can force unwanted distributions and tax consequences near retirement.
Sarah Chen, Payroll Tax Analyst
Best for employees who work at multiple companies and may be HCE at one or both
HCE status across multiple employers
Your highly compensated employee status is determined by your compensation at each employer separately, not your combined income. This creates unique planning opportunities and challenges.
Example: Strategic contribution allocation
David works two part-time executive positions:
Company A has excellent participation rates and rarely fails tests. Company B has poor participation among lower-paid employees and frequently fails ADP tests.
David's strategy: Maximize contributions at Company A (where he's not subject to testing) and contribute more conservatively at Company B (where corrections are likely).
Coordination challenges
Each employer's plan runs its own nondiscrimination tests without considering your other employment. You could face corrections at multiple employers simultaneously, compounding the tax impact.
Planning approach
Research the testing history at each employer before determining your contribution strategy. HR departments can often tell you whether the plan has historically passed or failed tests.
Key takeaway: Multiple job holders can strategically allocate 401(k) contributions based on each employer's nondiscrimination testing track record and their HCE status at each company.
Key Takeaway: Multiple job holders can strategically allocate 401(k) contributions based on each employer's nondiscrimination testing track record and their HCE status at each company.
Sources
- IRS Publication 560 — Retirement Plans for Small Business
- IRC Section 401(a)(4) — Nondiscrimination requirements for qualified plans
Reviewed by Sarah Chen, Payroll Tax Analyst 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.