Contributions, Allocations, and Annual Compliance Testing (ADP/ACP, 415, 401(a)(4))
The annual limits
Three separate ceilings apply to defined contribution plans. IRC 402(g) limits elective deferrals ($23,500 in 2025, plus a $7,500 age-50 catch-up). IRC 415(c) limits annual additions - deferrals, employer contributions, and forfeitures - to the lesser of $70,000 (2025) or 100% of compensation; catch-up contributions are excluded. IRC 401(a)(17) caps compensation used for allocations, testing, and deductions at $350,000 (2025). All three are indexed annually.
Nondiscrimination testing
ADP testing compares HCE and NHCE deferral percentages using either the 125% test or the 2-percentage-point/200% test; ACP testing does the same for matching and after-tax contributions. A plan may use current- or prior-year data, with prior-year testing available only if elected consistently. Safe harbor 401(k) designs - a 3% nonelective contribution or a basic match of 100% on the first 3% plus 50% on the next 2%, with required notice and immediate vesting - avoid ADP and ACP testing entirely. IRC 401(a)(4) governs everything else: contributions, benefits, and the availability of benefits, rights, and features must not discriminate in favor of HCEs, tested through design-based safe harbors or the general test, where cross-testing allows allocations to be converted into equivalent benefit accrual rates.
Traps
Do not count catch-up contributions toward 415(c). ACP testing excludes elective deferrals; ADP testing excludes matching contributions. Excess deferrals must be corrected by April 15 of the following year and are taxable in the year deferred, while excess 415 amounts follow different correction rules and can be taxed twice if not timely.
Rule of thumb: fix 402(g) failures by April 15; fix ADP/ACP and 415 failures with a corrective distribution plus earnings.