3717 / What is the minimum participation (50/40) test that applies to defined benefit pension plans?

A defined benefit plan also must benefit the lesser of (a) 50 employees or (b) the greater of (i) 40 percent of all employees or (ii) two employees (or if there is only one employee, that employee).¹ Governmental plans are not subject to this 50/40 test.²

Defined benefit plans must meet the minimum participation test on each day of the plan year. Under a simplified testing method, a plan is treated as satisfying this test if it satisfies it on any single day during the plan year so long as that day is reasonably representative of the employer’s workforce and the plan’s coverage. A plan does not have to be tested on the same day each plan year.³ Final regulations provide that a plan that does not satisfy the test for a plan year may be amended by the 15th day of the 10th month after the close of the plan year to satisfy the test retroactively.⁴ Comparable plans may not be aggregated for purposes of meeting this test.⁵

The 50/40 test may be applied separately with respect to each separate line of business if an employer makes an election to which the Secretary of the Treasury consents.⁶ Furthermore, the requirement that a separate line of business have at least 50 employees generally does not apply in determining whether a plan satisfies the 50/40 test on a separate line of business basis.⁷

A defined benefit plan’s prior benefit structure also must satisfy the minimum participation rule.⁸ The prior benefit structure under a defined benefit plan for a plan year includes all benefits accrued to date under the plan, and each defined benefit plan has only one prior benefit structure. A prior benefit structure satisfies the minimum participation rule if the plan provides meaningful benefits to a group of employees that includes the lesser of 50 employees or 40 percent of the employer’s employees. Whether a plan is providing meaningful benefits, or whether the employees have meaningful accrued benefits under a plan, is determined on the basis of all the facts and circumstances.⁹

The same employees who are excludable under the coverage tests ( Q 3842) generally may be excluded from consideration in meeting the 50/40 participation test.¹⁰ If employees who do not meet a plan’s minimum age and service requirements are covered under a plan that meets the 50/40 test separately with respect to such employees, those employees may be excluded from consideration in determining whether other plans of the employer meet the 50/40 test, but only if (1) the benefits for excluded employees are provided under the same plan as benefits for other employees, (2) the benefits provided to excluded employees are not greater than comparable benefits provided to other employees under the plan, and (3) no highly compensated employee is included in the group of excluded employees for more than one year.¹¹

An employee generally is treated as benefiting under a plan for a plan year if the employee actually accrues a benefit for the plan year. An employee who fails to accrue a benefit merely because of the IRC Section 415 limits ( Q 3868, Q 3719) or a uniformly applicable benefit limit under the plan’s structure is treated as benefiting under a plan for the plan year.¹²

As to which individuals must be treated as “employees” and which organizations make up an employer, see Q 3928, Q 3929, Q 3933, and Q 3935.