As financial advisors, you’re entrusted with helping clients navigate the complexities of retirement plan design and compliance. Among the most crucial regulatory obligations is coverage testing, often regarded as a technical hurdle but, when properly understood, is a powerful tool for fostering workplace fairness and financial security. At My Benefits, our mission as your Third-Party Administrator (TPA) is to make these concepts clear, actionable, and aligned with your clients’ goals.
Qualified retirement plans must pass annual coverage tests to ensure they do not disproportionately favor Highly Compensated Employees (HCEs) over Non-Highly Compensated Employees (NHCEs). The Internal Revenue Code requires these tests to hold plans accountable, thereby providing equitable benefits across the organization.
Identifying these groups is the first step toward proper compliance—a misclassification can have significant consequences for your client’s plan status.
Coverage testing isn’t just a checkbox requirement; it’s central to the tax-qualified nature of your client’s retirement plan. Failing coverage tests can lead to:
For advisors, understanding these principles shapes your ability to guide sponsors in avoiding pitfalls and proactively designing plans that support business objectives and promote inclusivity.
Ratio Percentage Test
This test verifies whether the plan covers a sufficient percentage of NHCEs relative to HCEs. It works as follows:
Average Benefits Test
If a plan doesn’t pass the Ratio Percentage Test, it may still pass under the more flexible Average Benefits Test by comparing average benefits received by NHCEs versus HCEs. This test, while technical, offers a safety net for creative plan designs or companies with evolving workforces.
To champion your clients and provide the most value, keep these strategies in mind:
At My Benefits, we act as a strategic extension of your practice—providing robust, accurate testing, clear reporting, and actionable recommendations. Our expertise ensures that your clients not only stay compliant but also maximize the value of their retirement benefit programs for every employee, from entry-level staff to senior leadership.
Coverage testing shouldn’t be viewed as just a compliance obligation, but as an essential process to ensure inclusivity and long-term plan viability. By partnering with a proactive TPA like My Benefits, you turn regulatory requirements into opportunities for stronger, fairer retirement outcomes.
Have questions or need tailored advice?
Reach out to your retirement plan experts at My Benefits—our team is here to help you and your clients navigate every aspect of retirement plan administration with confidence.
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