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What does the Actual Contribution Percentage test examine?
The total contributions by all employees regardless of compensation
Comparing before-tax contributions of HCEs and NHCEs
Comparing after-tax employee contributions of NHCEs with HCEs
Comparing total compensation among employees
The correct answer is: Comparing after-tax employee contributions of NHCEs with HCEs
The Actual Contribution Percentage (ACP) test is a crucial component of compliance testing for retirement plans, particularly regarding 401(k) plans. It specifically assesses whether the after-tax contributions made by highly compensated employees (HCEs) and non-highly compensated employees (NHCEs) are proportionate and uphold the nondiscrimination requirements set by the Internal Revenue Code. Choosing option C reflects an understanding that the ACP test focuses on comparing after-tax contributions from both HCEs and NHCEs. This comparison ensures that plans do not disproportionately favor HCEs in terms of contributions, which could lead to inequities within the plan's participation. By examining the contributions in this way, the ACP test helps maintain fairness in employee benefit plans. The other options do not correctly define the purpose of the ACP test. The total contributions by all employees are not specific to after-tax contributions (thereby making option A irrelevant). Additionally, the ACP test does not examine before-tax contributions, which distinguishes it from the Actual Deferral Percentage (ADP) test (reflected in option B). Lastly, while compensation comparisons are important in different contexts, such as determining HCEs, they are not the focus of the ACP test as presented in option D. Thus,