FAQ 973: ADP - Disproportionate Amounts and ADP/ACP Test


How does the system handle disproportionate amounts in ADP test, including the representative rate?


When a NHCE QNEC is used for ADP and ACP testing, the contributions that exceed the greater of 5% of compensation or two times the plan's representative contribution rate cannot be taken into account for testing. In the case of a prevailing wage Davis Bacon plan the contributions cannot exceed the greater of 10% of the NHCE's compensation or two times the plan's representative contribution rate.

This is also true for generous Match formulas (i.e. formulas in excess of 100% of deferrals) where a match is deemed to be disproportionate because it exceeds the greater of: 5% of compensation or 100% of deferral or 2 times the "representative contribution (match) rate"

The representative contribution rate is the lowest applicable contribution of any eligible NHCE among a group of eligible NHCEs that consists of half of all eligible NHCEs for the plan year OR if greater, the lowest applicable contribution rate of any eligible NHCE in the group of all eligible NHCEs for the plan year who is employed by the employer on the last day of the plan year. For example, if the representative rate is 7.40, than (7.40 x 2) leaving any contribution above 14.80% to be considered a disproportionate amount.

The system provides options in the "Disproportionate Amts Testing" section that meet the regulation requirements for disproportionate amounts testing for QNECs and Match contributions. The system provides a "Disprop. Amts support page" option which illustrates the contributions that are deemed disproportionate.

In utilizing the "Targeted QNEC for non-HCE" or "Targeted QMAC for non-HCE" options to satisfy a failed ADP or ACP test, the system adheres to the disproportionate amounts regulations, by issuing the Targeted QNEC in 5% increments until the test is satisfied.

More details on this issue can be found in Appendix 4 - Compliance Testing section of the Compliance Testing Training Manual . The manual can be accessed from the ASC Valuation System - ASC main menu by selecting:
Help > Manuals > ASC Compliance Manual.