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