How is the maximum HCE ADP determined when NHCE ADP is between 2% - 8%?

When determining the maximum Highly Compensated Employee (HCE) Average Deferral Percentage (ADP) in a 401(k) plan, specific formulas apply based on the Average Deferral Percentage of Non-Highly Compensated Employees (NHCE). If the NHCE ADP falls between 2% and 8%, the method used to calculate the maximum allowable HCE ADP is to take the NHCE ADP and add 2 percentage points.

This formula allows for a standardized approach to ensure that the contributions from HCEs do not disproportionately exceed those of NHCEs, thereby maintaining compliance with the non-discrimination rules established by the Internal Revenue Service. Adding 2 percentage points ensures that the disparity in contribution rates stays within acceptable legal limits while still incentivizing contributions from HCEs.

For instance, if the NHCE ADP is calculated at 4%, the maximum HCE ADP would be 6%, thus facilitating sustainable contribution practices while adhering to regulatory requirements.