For a first plan year using prior year testing, what is assumed for the ADP/ACP of the NHCEs?

In a first plan year utilizing prior year testing for the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP), the default assumptions for Non-Highly Compensated Employees (NHCEs) are critical for compliance with nondiscrimination rules.

When creating this assumption, the Internal Revenue Service (IRS) has established that for a newly established plan, NHCEs are assumed to have an ADP of 3% and an ACP of 3% unless actual data is available. This assumption allows the plan to move forward with nondiscrimination testing without needing to rely on actual contributions from NHCEs in the first year, which might not be fully reflective of their participation levels.

By using the 3% assumption, plan administrators can offer a straightforward method to demonstrate compliance with nondiscrimination requirements from the start of the plan year. This approach simplifies the administration of new plans, aligning with IRS guidelines which aim to facilitate retirement savings options while ensuring equitable treatment across employee classifications.