Coverage Testing

Coverage testing applies to the plan as a whole and may apply to certain contributions under certain circumstances. A plan must meet minimum coverage testing as set forth in IRC Section 410(b), which states that, to satisfy coverage testing, the plan must pass either of the following tests:

1. Ratio Percentage Test — To pass this test, either:
   • 70 percent of all Non-Highly Compensated Employees must be covered by the plan; or
   • The percentage of Non-Highly Compensated Employees covered by the plan must be at least 70 percent of the percentage of Highly Compensated Employees who are covered.
2. Average Benefit Percentage Test — There are two parts to this test, both of which must be passed:
   • The Non-Discriminatory Classification — The plan must benefit a classification of employees that does not discriminate in favor of HCEs; and
   • The Average Benefit Percentage Test — The average benefit percentage of the NHCEs must be at least 70 percent of the average benefit percentage of the HCEs.

Standardized plans are designed to pass coverage testing automatically, while individually drafted and non-standardized plans must undergo annual coverage testing.

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