Actual Deferred Percentage(ADP)

Meaning & Definition

The Actual Deferral Percentage (ADP) is a method of testing used in USA to measure if highly compensated employees have essentially the same contributions into a retirement plan (like 401K, 403b) when compared to non-highly compensated employees, and thus ensuring that the retirement plans offered by employers are truly offered to non-highly compensated employees (which means there should not be an unfair advantage given to high-earning or senior employees).

Significance of Actual Deferred Percentage(ADP):

• Provides a process for appropriately distributing employee retirement contributions.
• Prevents discrimination against employees who do not have highly satisfying positions.
• Assists a company in maintaining its compliance with the IRS to provide a tax-qualified employee retirement plan.
• Promotes fair and equitable access to benefit plans for all employees.
• Helps protect U.S., based Payroll and Benefit teams against regulatory non-compliance.

Legal Compliance / Policy / Regulation (India):

The test for Actual Deferred Percentage (ADP) is not applicable in India.

In India, EPF, EPS and Gratuity laws determine retirement and pension benefits. They therefore do not have an ADP type of “Discrimination Testing” for Provident Fund contributions. Indian companies employing U.S. citizens must comply with ADP testing requirements on any applicable retirement plan items related to that employment.