How is the contribution of HCEs tested within the ACP test?

The correct answer highlights that the contribution of Highly Compensated Employees (HCEs) is tested against the contribution rates of Non-Highly Compensated Employees (NHCEs). This comparison is essential to ensure compliance with nondiscrimination requirements under the Actual Contribution Percentage (ACP) test, which is a part of the broader suite of regulations established under the Employee Retirement Income Security Act (ERISA).

By comparing HCEs' contributions to NHCEs', plan sponsors can demonstrate that the benefit provided to HCEs does not disproportionately outweigh that provided to NHCEs. This protection is crucial to preventing excessive benefits being directed toward higher earners at the expense of the overall employee population, thereby ensuring fairness and compliance with tax regulations governing retirement plans.

The rationale behind this testing process is to ensure that plans remain accessible and equitable across all employee groups, promoting the intended purpose of retirement plans as a benefit for a broad array of employees.