RPF M5 U2 Minimum Coverage Testing Flashcards
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What is coverage testing?
Coverage testing compares the percentage of NHCEs who benefit from a plan or a plan component to the percentage of HCEs who benefit.
What types of coverage testing are there?
The two types of coverage testing are the ratio percentage test and the average benefit test. Either test can be used to satisfy coverage testing.
How is the ratio percentage test performed?
To perform the ratio percentage test, identify employees as either HCEs or NHCEs, determine who is benefiting in each group, and calculate the ratios to find the ratio percentage.
What does it mean for an employee to be benefiting?
Benefiting means the employee was eligible to receive money in the plan or had the option to contribute to the plan.
Who are nonexcludable employees?
Nonexcludable employees must be included in minimum coverage testing regardless of whether they are benefiting.
What are statutorily excludable employees?
Statutorily excludable employees are those who do not satisfy the plan’s minimum age and service requirements, union employees, nonresident aliens with no U.S. income, and terminated employees who worked 500 or fewer hours and did not benefit.
What is the ratio percentage test?
The ratio percentage test compares the percentage of benefiting NHCEs to the percentage of benefiting HCEs, requiring a minimum ratio percentage of 70% to pass.
How many minimum coverage tests must be performed?
The number of coverage tests depends on the types of contributions and allocations a plan has, with some components tested together and others separately.
What happens if a plan contains no HCEs?
When a plan or plan component contains no HCEs, coverage testing is automatically deemed to pass.
What happens if a plan contains only HCEs?
When a plan or plan component contains only HCEs, coverage testing is also deemed to pass.
What types of coverage testing are there?
The two types of coverage testing are the ratio percentage test and the average benefit test. Either test can be used to satisfy coverage testing. Coverage tests must be performed separately on components of the plan, such as pre-tax salary deferrals or profit-sharing contributions.
How is the ratio percentage test performed?
The ratio percentage test divides the number of benefiting NHCEs by the total number of NHCEs, and the number of benefiting HCEs by the total number of HCEs. The percentage of benefiting NHCEs is then divided by the percentage of benefiting HCEs to determine the ratio percentage. The ratio must be at least 70% for the plan to pass.
What are the exclusions in the ratio percentage test?
Certain types of employees (including those who do not satisfy minimum age and service requirements) may be excluded from the calculation, while others are nonexcludable (such as terminated employees who benefited during the year).
