Minimum Coverage Test

To show nondiscriminatory coverage, plans must satisfy one of two tests:

• The Ratio-percentage test compares the proportion of non-highly compensated employees (NHCEs)benefiting to the proportion of highly compensated employees (HCEs) benefiting under a plan.
  
• The Average Benefits Test compares the percentage of NHCEs benefiting from the plan and benefits received by these employees from the plan, as a percentage of compensation to the comparable figures for HCEs.

Contributory and noncontributory 403(b) plans are usually tested separately. Further, if an employer has both a 403(b) and a qualified plan, the qualified plan is tested separately. When testing the 403(b) plan for minimum coverage, however, the qualified plan can be taken into account. If general nondiscrimination requires that you disaggregate your noncontributory plans for testing purposes, each plan must also meet minimum coverage requirements independently.

Union employees are generally tested separately from nonunion employees.

When to run a test

You may run your coverage test any day during the plan year that is reasonably representative of workforce composition and plan coverage ("snapshot testing"). Testing may be as seldom as once every three years as long as there haven't been any significant changes since the last test date, e.g., changes in legal requirements, plan provisions, or employee population or participation ("three-year testing").

To satisfy the ratio-percentage test, the percentage of NHCEs benefiting under each plan or aggregation of plans must equal at least 70 percent of the percentage of benefiting HCEs. "Average benefits" applies a subjective and an objective test to employee coverage, then compares all benefits received to assure that NHCEs' average benefits are at least 70 percent of HCEs' average benefits.

If a plan fails to satisfy one of these tests and no correction is made, at least the HCEs may be taxed on contributions made during the year the plan fails. However, plans have until the 15th day of the 10th month after the end of the plan year to correct the failure by expanding coverage.