Actual Deferred Percentage (ADP)
Actual Deferred Percentage (ADP) is a term used in retirement savings plans, particularly in the context of a 401(k) plan. It refers to the average percentage of an employee’s salary that is contributed to their 401(k) account as elective deferrals. The ADP is calculated by considering the voluntary contributions made by eligible employees, excluding any employer matching contributions or other employer contributions.
The ADP test is typically conducted annually to assess the plan’s compliance with IRS regulations. If the ADP of highly compensated employees exceeds certain thresholds, corrective actions may be required, such as returning excess contributions or providing additional contributions to non-highly compensated employees. Employers may need to adjust employee contributions or implement other strategies to satisfy the ADP test and maintain the plan’s tax-qualified status.
In summary, Actual Deferred Percentage (ADP) refers to the average percentage of an employee’s salary that is contributed to their 401(k) account as elective deferrals. It is a metric used to assess the compliance of a retirement savings plan with IRS non-discrimination requirements. The ADP test compares the deferral percentages of highly compensated employees to that of non-highly compensated employees. Employers may need to take corrective actions if the ADP of highly compensated employees exceeds certain thresholds to ensure the plan’s tax-qualified status.