Average Deferral Percentage (ADP) test explained by Professional Benefit Services

hello and welcome to today's video

explaining the actual deferral

percentage or ADP test if you have ever

had any money returned to you after your

end or were limited as to what you could

defer then you know the effects of

failing this test let's run through an

example of how this test is performed in

this test we measure the ratio of

deferrals as a percentage of pay between

the highly compensated employees or hces

and the non highly compensated employees

referred to as n hces

and hce is defined as one a more than 5%

owner to a family member of a 5% owner

subject to family attribution rules or

three an employee who earns over the

compensation threshold in the prior year

or is in the top 20 percent paid group

everybody else that has satisfied the

agent service requirements would be

considered an NH c e here you can see

that we have segregated the employees

into those that are hces and those that

are NHC es we then take their to fro

mount and divide it by their annual

compensation and get a percentage

deferred when this is average for the

hce group we get an average deferral

percentage in this case it's 5% then we

go through the same calculations with

the NHC es take their deferral amounts

and divide by their compensation and

with this group we come up with an

average deferral rate of 3.75 percent

the test then says that if the NHC

average defer rate is between 0 and 2%

the AC can defer twice that rate on

average if it is between 2 and 8 percent

DHC can defer 2% more on average and if

it is greater than 8% the HC can defer

one point to five times the NHC e rate

on average in this case the NHC average

deferral rate is 3.75 percent so

following the formula we would add 2

percent to the 3.75 percent to come up

with five point seven five percent this

hce group passes the test because the 5

percent average deferral rate is less

than the five point seven five deferral

rate maximum

loud the correction of any failure is to

have money come back as taxable income

to the hces

in that tax year and as long as that

happens within two and a half months

after the plan year ends there will not

be any additional penalties our hope

with this video is that you have a

clearer understanding of your plan and

potential testing issues that you may be

facing this information is for reference

only there can be many variations to

this test so please contact our office

to review your specific plan