Certified Plan Sponsor Professional (CPSP) Practice Exam

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What is the maximum allowable contribution concentration for HCEs under the ADP test?

200% of NHCEs contributions
125% of NHCEs contributions
150% of NHCEs contributions
175% of NHCEs contributions

The correct answer is: 125% of NHCEs contributions

Under the Actual Deferral Percentage (ADP) test, the maximum allowable contribution concentration for Highly Compensated Employees (HCEs) is limited to 125% of the contributions made by Non-Highly Compensated Employees (NHCEs). This is designed to ensure that retirement plans are not disproportionately benefiting HCEs compared to NHCEs, promoting fairness and compliance with the nondiscrimination rules established by the Internal Revenue Service (IRS). Specifically, if the average contribution percentage for NHCEs is, for example, 4%, then HCEs can contribute a maximum of 5% (which is 125% of 4%). This limit helps to ensure that the plan remains accessible and effective for all employees while preventing discriminatory practices that favor higher-paid employees to a greater extent than their lower-paid counterparts. Understanding this limitation is crucial for plan sponsors when structuring their contribution matching features and ensuring compliance with federal regulations.