Certified Plan Sponsor Professional (CPSP) Practice Exam

What percentage of non-highly compensated employees can be excluded for a plan to satisfy the ratio percentage test under IRC Sec. 410?

1. 20%

2. 25%

3. 30%

4. 35%

The correct answer is: 30%

To satisfy the ratio percentage test under IRC Sec. 410, the plan must meet certain requirements regarding the eligibility and participation of employees. The relevant regulation allows for excluding a specific percentage of non-highly compensated employees in the determination of the plan's participation rate. The correct response indicates that a plan can exclude up to 30% of non-highly compensated employees. This is rooted in the provision designed to ensure that the plan does not disproportionately favor highly compensated employees over non-highly compensated employees. By allowing this exclusion, the IRS aims to balance the participation rates of different employee tiers while still maintaining a level of fairness in terms of employee access to retirement benefits. The 30% exclusion is particularly important in context because it allows plan sponsors some flexibility in meeting the minimum participation requirements without ensuring that every single non-highly compensated employee must be included in the testing. This helps to simplify the compliance process while still protecting the interests of lower-paid employees, thus fulfilling the intent of the legislation aimed at equitable employee benefit access.