If an employee does not receive an employer matching contribution due to not meeting allocation conditions, are they included in the ACP test?

An employee who does not receive an employer matching contribution due to not meeting allocation conditions is indeed included in the Actual Contribution Percentage (ACP) test. The ACP test is designed to ensure that the contributions made to a 401(k) plan do not disproportionately benefit highly compensated employees when compared to non-highly compensated employees.

For the purposes of the ACP test, all employees who are eligible to make contributions to the plan must be taken into account, regardless of whether they actually received matching contributions. The rationale behind this inclusion is to maintain fairness in how the contributions are evaluated, ensuring that the overall plan complies with nondiscrimination rules. This means that even if an employee did not meet the conditions for matching contributions, their own contributions (if any) will still be considered in determining whether the plan remains within the required limits set by the IRS. This way, the test can accurately reflect the contributions made by all employees eligible for participation in the plan.

Thus, including these employees in the ACP test helps to ensure compliance with federal regulations intended to promote equitable treatment across all levels of compensation within the workforce.