Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.
Nondiscrimination testing is performed on qualified plans to ensure that all participants benefit fairly. In this article we will explain the coverage testing, corrective measures and it’s deadlines:
- The test is required to prove that the plan meets certain coverage standards set under the IRC.
- There are two minimum coverage tests (Ratio test and Average benefit test) under IRC section 410(b) and a plan must pass either test in every plan year.
- If a plan fails then an additional employer contribution is required to satisfy this test.
Certain plans, such as those on a standardized adoption agreement are designed to automatically pass coverage testing. For more information on this topic make sure to contact your service provider.
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