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401(k) deferrals by highly compensated employees are limited based on the actual deferrals of non-highly compensated employees.
The 401(k) and match non-discrimination tests are commonly known as the average deferral percentage (ADP) and average contribution percentage (ACP) tests, respectively.
A highly compensated employee (HCE) is any employee who:
- owned more than 5% of the employer in the current or prior plan year;
- is a family member of the 5% owners; or
- earned more than $100,000 (for 2007) in the preceding plan year.
A non-highly compensated employee (NHCE) is any employee who is not a HCE.
Generally, the average 401(k) deferral of all HCEs is limited to 2% points higher than the average 401(k) deferral of all NHCEs. For example:
| Average 401(k) Deferral of NHCEs | Average Deferral of HCEs limited to: |
 |
| 0% | 0% |
|
| 2% | 4% |
|
| 4% | 6% |
|
| 8% | 10% |
|
The non-discrimination test that applies to matching contributions is the same as described above for 401(k) deferrals.
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