Compensation Glossary

Coverage rules govern the admission of employees to participation in a retirement or welfare plan. The term "coverage" also refers to the IRS and rules that are designed to insure that qualified retirement plans benefit a broad cross-section of the employer's lower compensated employees. The rules for determining whether coverage is adequate in this latter sense are: 1. The Average Benefit Percentage Test: A plan will pass this test if: (a) it benefits employees under a classification that the does not discriminate in favor of highly compensated employees (the classification test); and (b) the "average benefit percentage" for lower compensated employees (their plan benefits expressed as a percentage of their compensation) is at least 70 percent of the average benefits percentage for highly compensated employees. 2. Minimum Participation Rule: A requirement for qualified retirement plans that a plan benefit at least the lesser of: (a) 50 employees; or (b) 40 percent or more of all employees of the employer. 3. Ratio Test: This test requires that the plan benefit a classification of employees that does not allow more than a specified difference between the percentage of an employer's highly compensated employees who are covered and a similarly computed percentage for lower compensated employees. For this purpose, the maximum allowable difference is a 70 percent ratio. 4. 70 Percent Test: This test requires a plan to benefit 70 percent or more of all of the employer's lower compensated employees. For this purpose, all eligible employees are considered to benefit under a plan. In a Section 401(k) plan, or a plan to which employees may voluntarily contribute or may receive employer matching contributions, all employees eligible to contribute will be considered to benefit in that portion of the plan.