What it is
A 401(k) plan that is not a safe harbor design must show that highly compensated employees do not benefit disproportionately from deferrals (the ADP test) and from matching and after-tax contributions (the ACP test). Each test compares the average ratio for highly compensated employees with the average for everyone else.
This workbook takes one row per eligible employee, computes each ratio, averages the two groups, applies the allowed limit and shows pass or fail with the reduction needed. Use it to recompute a plan’s results or check testing from a third-party administrator. Test factors, the highly compensated threshold and the testing method are inputs you set from the plan document and current IRS guidance.
When to use it
- Recomputing the plan’s ADP and ACP results during a plan audit.
- Checking the testing a third-party administrator provided.
- Estimating whether a plan is at risk of failing before year end.
What’s inside
- Parameters: testing method, HCE threshold, test factors and safe harbor flag
- ADP and ACP tabs for up to 150 eligible employees
- Averages, two limits, allowed average and result
- Reduction needed in percentage points and a rough dollar indicator
Standard cited
This template follows IRC 401(k)(3) / 401(m). It is written in our own words, except for phrases the standard requires the document to contain, with [bracketed placeholders] for client details, amounts in USD and dates as MM/DD/YYYY. Check it against the current standard and your firm’s methodology before use.
Questions
What is the pass rule?
The HCE average passes if it is no more than 1.25 times the NHCE average, or no more than the lesser of two times the NHCE average and the NHCE average plus 2 percentage points. The factors are inputs and match IRC sections 401(k)(3) and 401(m)(2).
Who is highly compensated?
An owner of more than 5%, or an employee with compensation above an IRS dollar threshold in the look-back year, under the plan’s election. The sheet takes your Yes or No for each person; the IRS sets the dollar threshold each year.
Does the dollar figure show the refund?
No. It is a rough indicator. Corrections such as refunds of excess contributions or qualified contributions are computed by the plan’s administrator, with deadlines and excise tax consequences that depend on the plan’s facts.
Related templates
- Employee Benefit Plan Participant Data Testing Workpaper
- Contributions and Remittance Testing Workpaper (Retirement Plan)
- Employee Benefit Plan Audit Planning Memo (ERISA)
Last updated 11/05/2026. All free templates.