If the employer did not make a matching contribution in the prior year, what impact will that have on the ACP test?

In the context of a 401(k) plan's Actual Contribution Percentage (ACP) test, the absence of employer matching contributions from the previous year fundamentally impacts the results of this test. The ACP test is designed to ensure that the contributions made to the plan do not disproportionately favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).

When an employer does not provide a matching contribution, it means there are generally fewer resources being allocated towards encouraging participation among NHCEs. This lack of employer matching could lead to a situation where NHCEs are less incentivized to contribute as compared to their HCE counterparts, who might be able to contribute more independently. Consequently, the relative contribution rates between these groups could become skewed, leading to a higher likelihood of failing the ACP test.

If it turns out that HCEs are contributing significantly more than NHCEs, the plan could be deemed noncompliant due to that disparity, thereby causing the ACP test to fail. For these reasons, the absence of a matching contribution in the prior year is a pivotal factor that can directly influence the overall dynamics of the ACP test and potentially lead to its failure.