3843 / What is the ratio percentage test that can be used to determine whether a qualified plan satisfies the minimum coverage requirement?
A plan satisfies the ratio percentage test when benefits apply to either 70 percent of all non-highly compensated employees (i.e., the percentage test) or a percentage of the non-highly compensated employees that is at least 70 percent of the percentage of highly compensated employees benefiting under the plan.1 A participant generally is treated as benefiting if he or she receives an allocation under a defined contribution plan or who has an increase in a benefit accrued or treated as an accrued benefit.2 Individuals are treated as benefiting for deferral purposes if they are eligible to defer, even if they choose not to do so.3
Example: Smith Steel Company has a profit sharing plan that allocates a contribution to cover nine of its 10 non-excludable highly compensated employees and 160 of its 200 non-excludable non-highly compensated employees. Under its plan, otherwise eligible participants do not receive a contribution unless they are employed at year-end. One of the highly compensated participants and 40 of its non-highly compensated terminated and did not receive an allocation. The plan’s ratio percentage is determined by dividing the percentage of the non-highly compensated employees who benefit under the plan (160/200, or 80 percent) by the percentage of the highly compensated employees who benefit under the plan (9/10, or 90 percent). Smith Steel’s ratio percentage is 80/90, or 89 percent; thus, it passes the 70 percent ratio percentage test.4
1. IRC § 410(b)(1)(A), (B).
2. Treas. Reg. § 1.410(b)-3(a).