The formulas
- NHCE % = NHCEs benefiting / all nonexcludable NHCEs
- HCE % = HCEs benefiting / all nonexcludable HCEs
- Ratio percentage = NHCE % / HCE %, rounded to the nearest hundredth; pass at 70% or more
How it works
A qualified plan must satisfy section 410(b) each plan year. Under 26 CFR 1.410(b)-2(b)(2) the ratio percentage test is met if the plan's ratio percentage is at least 70 percent. Section 1.410(b)-9 defines the ratio percentage as the percentage of nonhighly compensated employees benefiting divided by the percentage of highly compensated employees benefiting, rounded to the nearest hundredth of a percentage point.
The regulation's examples: a plan benefiting 70 percent of NHCEs and 100 percent of HCEs has a ratio of 70 percent and passes; one benefiting 40 percent of NHCEs and 60 percent of HCEs has 66.67 percent and fails. Count only nonexcludable employees, after the age, service and other exclusions the regulations allow.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What if the plan fails the ratio test?
It can still satisfy section 410(b) through the average benefit test, which combines the nondiscriminatory classification test and the average benefit percentage test.
If every HCE benefits, how many NHCEs must benefit?
At least 70 percent of nonexcludable NHCEs, as in Example 1 of the regulation.
Sources
- 26 CFR 1.410(b)-2 Minimum coverage requirements, eCFR
- 26 CFR 1.410(b)-9 Definitions (ratio percentage), eCFR
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