Understanding Section 401 Nondiscrimination Tests

This section describes:

  • Basic and Alternate Section 401(k) Tests.

  • Basic and Alternate Section 401(m) Tests.

  • The Aggregate Limit Test.

Important! PeopleSoft Benefits provides these nondiscrimination tests for your use as a template, not to be used for actual reporting.

To be considered nondiscriminatory, a 401(k) plan must meet one of two tests:

  • The basic Actual Deferral Percentage (ADP) test for Section 401(k) states that the average ADP for highly compensated employees (ADP HCE) cannot be more than a certain percentage of the average ADP for employees who are not highly compensated (ADP NHCE).

  • The alternate ADP test requires that the ADP HCE cannot exceed the ADP NHCE by more than a certain percentage, provided that the difference between the ADP HCE and the ADP NHCE does not exceed a certain percentage point.

The basic Actual Contribution Percentage (ACP) test for Section 401(m) states that the average ACP for highly compensated employees (ACP HCE) cannot be more than a certain percentage of the average ACP for employees who are not highly compensated (ACP NHCE ).

According to the alternate 401(m) test, the ACP HCE cannot exceed the ACP NHCE by more than a certain percentage, provided that the difference between the ACP HCE and the ACP NHCE does not exceed a certain percentage point.

If both the ADP and ACP tests do not pass the basic percentage test and both pass the alternative percentage test, the system automatically runs the new Aggregate Limit test when you run the 401(k) or 401(m) NDT report. The Aggregate Limit Test indicates that the sum of the ADP and ACP for the entire group of eligible highly compensated employees cannot exceed the aggregate limit of the nonhighly compensated group, which is the greater of:

  1. The sum of 1.25 times the greater of the ADPNHCE or the ACPNHCE and 1.25 times the greater of the ADPNHCE or the ACPNHCE AND

  2. Two percentage points plus the lesser of the ADPNHCE or the ACPNHCE, with the exception that this cannot exceed two times the lesser of the ADPNHCE or the ACPNHCE OR

  3. The sum of 1.25 times the lesser of the ADPNHCE or the ACPNHCE AND

  4. Two percentage points plus the greater of the ADPNHCE or the ACPNHCE, with the exception that this cannot exceed two times the greater of the ADPNHCE or the ACPNHCE.

The results of the Aggregate Limit Test appear on the new Section 401 Results page after the 401(k) and 401(m) reports have been run. If you view the Section 401 Results page before you run one or both of these reports, the Aggregate Limit Test portion of the Section 401 Results page will be blank.