Certified Plan Sponsor Professional (CPSP) Practice Exam

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What does the Actual Deferral Percentage test analyze?

Comparison of NHCEs and HCEs salary deferral contributions
Overall plan performance metrics
Investment returns across different funds
The number of participants in each category

The correct answer is: Comparison of NHCEs and HCEs salary deferral contributions

The Actual Deferral Percentage (ADP) test is specifically designed to analyze the salary deferral contributions made by participants in a retirement plan, distinguishing between Non-Highly Compensated Employees (NHCEs) and Highly Compensated Employees (HCEs). This test ensures that the contributions made by HCEs do not disproportionately exceed those made by NHCEs, maintaining compliance with nondiscrimination rules set forth by the Internal Revenue Service (IRS). By comparing the contribution percentages of these two groups, the ADP test helps to guarantee that retirement plans remain equitable and accessible to employees at all compensation levels. The other options do not pertain to the primary focus of the ADP test. While overall plan performance metrics and investment returns are important aspects of retirement plan management, they fall outside the scope of what the ADP test evaluates. Similarly, simply counting the number of participants in each category does not address the comparative nature of contribution percentages that the ADP test specifically assesses.