Certified Plan Sponsor Professional (CPSP) Practice Exam

Which two tests are allowed under the Internal Revenue Code for the 410(b) coverage test?

1. The Equal Contribution Test and The Average Salary Test

2. The Ratio Percentage Test and The Average Benefits Test

3. The Participation Ratio Test and The Benefit Coverage Test

4. The Compliance Test and The Analysis Test

The correct answer is: The Ratio Percentage Test and The Average Benefits Test

The Ratio Percentage Test and the Average Benefits Test are specifically established under the Internal Revenue Code to assess compliance with the 410(b) coverage requirements. The primary purpose of these tests is to ensure that retirement plans do not disproportionately favor highly compensated employees over non-highly compensated employees in terms of participation and benefits. The Ratio Percentage Test measures the ratio of the number of non-highly compensated employees (NHCEs) who participate in the plan compared to the number of NHCEs eligible to participate. For a retirement plan to pass this test, the ratio must meet a certain threshold, indicating that a sufficient percentage of NHCEs are participating. On the other hand, the Average Benefits Test looks at the average benefits provided to NHCEs compared to those provided to highly compensated employees (HCEs). This test ensures that the average benefit levels offered to NHCEs are adequate when compared to HCEs, further ensuring that the plan does not disproportionately benefit HCEs. Using these tests, plan sponsors can demonstrate that their retirement plans provide fair coverage to all employees, fulfilling the requirements set forth by the Internal Revenue Service (IRS) for maintaining tax-qualified status.