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Average deferral percentage (ADP) testing

The average percentage of compensation that highly compensated employees and other employees put into the plan is compared as a percentage of their compensation. A nondiscriminatory 401(k) plan exists when the difference between the average percentages for the highly compensated employees and the rest of the employees falls within a certain range.

The actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test provide a limit on the amount that certain benefits offered to highly compensated employees under the plan may exceed the benefits provided to those who are not highly compensated. These compliance tests are not needed for nonqualified deferred compensation plans, giving NQDC plans more flexibility.