Actual Deferral Percentage / Actual Contribution Percentage - ADP/ACP Test
Categories: Tax, Retirement, Trusts and Estates
This complex concept refers to continued tax deductible qualification for 401K plans, and specifically targets the most well-paid employees at the company. The basic notion in creating rules around the amount that the highest paid could defer in taxes revolved around the notion of "progressive" tax. That is, the CEO making a million bucks a year shouldn't be able to defer 500 grand, year after year; the taxpayers need her taxes today. Not in two decades. And the whole notion or rationale for the 401k system in the first place was to focus on the middle class wanting to save for retirement so that they could golf with the grandkids and have a decent quality of life until they had that heart attack in bed with the 27-year-old hottie. Anyway, the ADP/ACP rules dictate that, in order for employees and the company to continue benefitting from 401k tax deductibility, they must adhere to some maximum salary deferral percentages, such that the ratios compress the spread from the highest earners to the lowest earners.
The IRS defines a highly compensated employee, or HCE, as an employee who owns more than 5% of the company (and that 5% can happen even for 14 seconds at any time during that year), or that that employee has earned more than $120,000. In order to qualify for maxing out the 401k, a bunch of financial metrical tests are done to cover the highest earners. One is what's called a 410b coverage test, which basically just makes sure that all of the employees of a given status have access to that 401k plan. Like...it wouldn't be fair to only offer it to the top three earners in the company, and then the next 12,000 toil and suffer paying taxes.
Another test, the ADP (Average Deferral Percentage) test, compares the actual salary deferral percentage of highly compensated with non-highly compensated people. To figure out what the max cap is on comp, the ADP test just uses the same rules that already exist in Roth IRAs as they apply to pretax savings of dough. Because of the way in which the caps are defined and structured as to what the highest earners can tax-defer, companies are financially encouraged to make matching contributions in many cases. That is, if it's the CEO's dough at stake, and the rest of the company has to get some deal relatively close at least in structure to what she is getting, then the IRS is betting that the CEO will take care of herself along with the others so that everyone's compensation is tax-optimized. And as an outgrowth of these issues, a few other tests in qualifying for 401k treatment have evolved, like the ACP test, where the actual contribution percentage test compares average of the percentage of after-tax and matching contributions for highly compensated and non. There has to be some minimum and maximum ratio that gets tax-deferred among all employees in the company, again because Boss Hog was hogging a lot of the tax deferrals in a few cases, so amendments to the structure had to be made.
The goal was to make sure actual usage of the program was high across the whole company. And lastly, another set of tests evolves to make sure the benefits go deep in the organization, not just living or being deployed for tax deferral at the top. Specifically, if more than 60% of the assets go to to key employees (often a somewhat different group from those defined as "highly compensated") then the org is too top heavy. The broader goal? Fairness. Egalitarianism. Something like that, anyway.
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Shmoop and the Bible: Song of Solomon. I'm Cecil B DeShmoop here and today we're
gonna be talking about the Song of Solomon - that doesn't refer to Solomon's [man stands on stage]
go to karaoke jam, which by the way is Britney Spears "toxic" - bet you didn't know
that - and yes it makes everyone in the karaoke bar very uncomfortable. Anyway. We
all know that the Old Testament is known for being a little, you know fire and [book open]
brimstone, but Song of Solomon puts the brakes on all that in order to tell [couple picnicking]
a good old-fashioned love story. And, you might want to put a can next to you. this
gets sickeningly sweet. So, the Song of Solomon also known as the Song of Songs [man holds can]
deals with two young people who are deeply in love, but in a super creative [couple watches sunset]
plot twist her family doesn't approve. The book begins with the bride talking
about her potential groom it's pretty disgustingly clear that they're in love [couple on a boat]
but this is actually the first time in the Bible that we see two people in love.
So, SOS is kind of saying hey guys love can actually exist between people and [couple shares spaghetti]
it's an awesome God-given gift. I mean sure it can also be seen as a
representation of God's love for Israel, You know, God equals man, Israel equals [bearded man mails letter]
woman but I'd like to think God would have penned better lines, "then your neck
is like the Tower of David built in rows of stone". Yeah like come on that's [ couple talks outside tents]
definitely a dumb boy's attempt at really flirting. All right. And you know I'm
speaking from experience here. Well, she says his love is better than wine, which [couple in vineyard]
is nice and all but my wife once told me that marrying me was the, and I quote,
"single greatest regret of her life". unquote. Though, you know comparable. Well [couple in a church]
a lot of the imagery in the poem is based on nature, which is a nice concept
until you realize that the dude was probably scribbling this last minute. [man writes while running]
Like, come on check out these choice lines. "Your hair is like a flock of goats" That's really really bad. That was a compliment back then.
"Your teeth are like a flock of shorn sheep." yeah those things did he just pick out
random things he saw on the road to her place or what? And, like it's a little
weird. like why is he so into barnyard animals? hmm hmm
And anyway back to our couple. Well, the sketchy groom runs to the bride's window [ man approaches building]
to invite her to escape with him - classic move - and sure they fantasize about it
but that's about as far as that scene goes. It's g-rated- which is probably
smart move on her part. Who knows where goat boy's mind might [ couple lays in grass]
wander. Baaaa. well the next scene comes from a dream the bride has. In it she [girl in bed]
sees her groom dressed as King Solomon surrounded by tons of servants. It might
just be one servant who weighs tons, and glad they focus on her dreams and not
his, all that bleating would give me a headache.
anyway we then switched to the groom's point of view and we get to hear about [couple argue]
how great his bride is and how much it stinks that she's so far away. Riveting.
next we go back to some dreams the bride's having. In one she's dressed as a [woman in costume]
giant armadillo- we're not making this up people- giant armadillo. And she's singing
the 12 days of Christmas while people throw bananas at her. Which have appeal.
and another she can see the groom at her window but she can't get to him. Only one [woman waves from window]
of those dreams is true, and all right well we'll leave it up to you to decide
what we made up there. Sorry, just a curveball. All right, well the poem
continues with the bride describing how attractive her groom is - yikes. [woman writes while sitting under a tree]
Watch out guys, getting real pg-13 now up in here.
wonder if someone's being paid by the word for this scintillating tale. Well we
continue reading about how much these two saps love each other and how
obsessed they are with each other, and we all know a couple like this. We all hate [man scowls in the corner]
a couple like. This, we all secretly cackle when that couple breaks up - Angie,
Brad- some of us don't even secretly cackle. some of us have lost friendships
over our public cackling. All right, I stand by it. [,man shrugs]
Anyway as the book comes to a close we see that the bride hasn't disowned her
protective family, but instead is pleading with them to let her groom into [mother and father pictured]
the house. they're probably like "well when he's written to you, why is he so into goats?"
"What's up with that?" Well the book ends with family saying "yeah you're too young
to get married but we'll help you plan a marriage when [couple at a wedding]
you come of age ,but for real he's super into goats. Just saying" . All right, well
it's implied in the bride yelled "you just don't understand our love", and
and stormed off to her room to pout and listen to whatever mixtapes[girl listens to music]
the groom had made for her. Well, the books last lines are final declarations
of love from both the groom and the bride. You can now use that can I told [couple holds hands]
you to put next to you at the start of this video. Got it all out? Excellent, here
we go, that's the Song of Solomon. Well I'm off to write my wife a beautiful poem
I'm thinking it'll go something like your "eyes are like a gang of pigs that [man stands waving arms]
want to have a street fight against another gang of pigs, your lips are like
two worms thrashing about in manure " . See, it's romantic gestures like these that
make my wife Google things like "can a marriage be annulled after 16 years?" [woman scowls]
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