Minimum Coverage Test
Among many other Internal Revenue code requirements, a
tax- qualified retirement plan must cover a minimum percentage -
generally 70 percent - of all of the plan sponsor's employees.
This minimum coverage test calculates the percentage of
employees who are covered by a retirement plan by counting all employees
(including leased employees) of the plan sponsor, as well as the employees
of companies controlled by, or affiliated with, the plan sponsor.
In general, another company is controlled by the
plan sponsor if it is 80 percent or more owned by the sponsor, or 80
percent or more owned by the owners of the sponsor.
Sometimes an employer wishes to exclude certain groups of employees from
their qualified retirement plan. They may wish to exclude a certain
class of employees, like all hourly employees or all salaried employees.
In other instances, the employer may consist of a controlled group of
companies and they may wish to include employees from Companies A and C
but not Company B.
The minimum coverage tests that determine whether an employer can
exclude certain groups of employees are many and varied. To determine if
a group can be excluded requires a great deal of information including
complete and accurate ownership information and census data.
As a sponsor of your plan, it is your responsibility to provide complete
and accurate information, both at the inception of your plan and on an
ongoing basis. If there are any changes in your company's structure such
as acquisition of a new affiliate, sale of an affiliate, ownership
changes, etc., you must notify Executive Benefit Plans immediately so
the plan can be tested appropriately.
A plan which does not pass the required minimum coverage tests may be
required to make contributions on the behalf of previously excluded
employees in order to satisfy the minimum participation requirements.
Topical Articles of Interest:
August 31, 2008
Failed ACP Test
Failed ADP Test
Multiple Use Test
PEO Client Outside
provided for review and consideration only. Please consult legal and tax
practical advice pertaining to your business and personal situations.
This page was last reviewed and/or updated
Friday, July 03, 2015 05:22 PM