If you’re a small business owner sponsoring a 401(k) plan, the IRS doesn’t just check that the plan exists — it checks every year whether the plan disproportionately benefits owners and highly paid employees over everyone else. Fail one of these tests, and you’re looking at refunded contributions, extra employer money, or an excise tax. Here’s how the three real tests actually work in 2026.
The Top-Heavy Test
A plan is top-heavy if “key employees” — generally owners with more than 5% of the business, officers earning above a set threshold, or 1%-plus owners earning over $150,000 — hold more than 60% of total plan assets. Most small-business 401(k)s with a handful of owner-employees and few staff trip this test almost automatically. If the plan is top-heavy, the employer must contribute a minimum of 3% of pay to every non-key employee’s account (or match the key employees’ rate, whichever is lower) for that plan year.
The ADP Test (Actual Deferral Percentage)
The ADP test compares the average percentage of pay that Highly Compensated Employees (HCEs) defer against what Non-Highly Compensated Employees (NHCEs) defer. For 2026, an employee is an HCE if they own more than 5% of the business (directly or through family attribution) at any point in 2025 or 2026, or if they earned more than $160,000 in compensation during 2025. Depending on what the NHCE group averages, the HCE group’s average deferral rate generally can’t exceed it by more than roughly 2 percentage points, with an overall cap tied to 2x the NHCE average.
The ACP Test (Actual Contribution Percentage)
The ACP test runs the same comparison, but on employer matching contributions and any after-tax employee contributions rather than elective deferrals. A plan can pass ADP and still fail ACP if the match formula effectively rewards owners more than staff.
What Happens If You Fail
A failed ADP or ACP test has to be corrected within 12 months of the plan year end. The two standard fixes are: refund excess contributions back to the HCEs (which creates taxable income for them and can trigger a 10% excise tax on the employer if not corrected within 2½ months of year-end), or make additional “qualified nonelective contributions” to NHCEs to bring the average up. Neither is a fun conversation to have with your co-owners in March.
The Way Most Small Businesses Actually Avoid This
The most common real-world fix isn’t better test management — it’s switching to a Safe Harbor 401(k), which is exempt from ADP, ACP, and top-heavy testing entirely in exchange for a fixed, IRS-approved employer contribution formula. For an owner-heavy small business where a handful of principals want to defer the maximum $24,500 (2026 limit) without worrying every year about a failed test, Safe Harbor is usually the simpler, more predictable path — see the full plan-design comparison for the real match-formula tradeoffs.
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