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When is 410(b) coverage testing required?
Updated over a week ago

Companies can receive significant tax breaks when they sponsor a 401(k) plan for their employees. But in return for the tax breaks, the company must meet all the IRS requirements for qualified plans. One of these requirements is that the plan can’t be just for the benefit of owners and highly compensated employees or executives (HCEs), but must also cover lower-paid, non-highly compensated employees (NHCEs), as well.

To prove that a proper balance between highly compensated and non-highly compensated employees is maintained, the IRS requires that 401(k) plans pass several nondiscrimination tests.

One of the tests sometimes required is the 410(b) coverage test. Generally speaking, 410(b) testing passes if at least 70% of the NHCE employees receive the retirement benefit. Not all plans are required to test for 410(b) — it depends on the plan design and whether related entities have different retirement plan designs.

When is 410(b) coverage testing required?

If every employee (other than certain non-resident aliens and union employees) at least age 21 and has completed 1 year of service for the employer (including all related entities of the employer), is receiving all plan benefits, 410(b) testing is not required. Because Guideline plans cannot have eligibility restrictions greater than 1 year of service or age 21, most Guideline plans do not require 410(b) testing.

There are, however, some exceptions. Here are the most common:

Last day requirement

Many Guideline plans have a last day requirement for profit sharing contributions, which means that a person who has met the age and service requirements of the plan might still not be eligible to receive a profit sharing contribution if they are dismissed from employment before December 31 of the applicable plan year.
At the time a profit sharing contribution is calculated with a last day requirement, Guideline will determine if the plan can pass coverage testing. If the plan cannot pass, the Guideline plan document includes a fail-safe provision that requires the plan to waive the last day requirement for the minimum number of eligible participants that are needed to pass coverage testing. Guideline will automatically expand the group of NHCEs who are eligible for profit sharing beginning first with the employees who have completed the greatest amount of service in the plan year.

Employers with related entities

Coverage testing looks at all employees of the “employer” as defined by the IRS. This includes all entities that are controlled groups and/or affiliated service groups.

For example, if one entity in a controlled group offers a 401(k) plan with a matching contribution and another offers a 401(k) plan with a nonelective contribution, coverage testing will be required to ensure each plan can pass the 410(b) test for the benefit that is only offered to one group of employees (match/nonelective, since both plans offer elective deferrals, 410(b) testing is likely not required for that benefit). If the plan(s) fail 410(b), typically the plans will need to be amended so that more NHCEs are eligible for the applicable benefit.

If a plan passes coverage testing, additional nondiscrimination testing may still be required for the applicable plan benefit. For example, if all participants in a plan are eligible for matching contributions but the plan does not have a safe harbor design, ADP and ACP testing will be required to ensure the average deferral and matching contribution percentages among the HCEs does not exceed the allowable limit based on the average of the NHCEs.


For more information on how the coverage test works, see here.


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