Average Benefit Percentage Test Calculator
Average Benefit % for Non-Highly Compensated Employees (NHCEs): Average Benefit % for Highly Compensated Employees (HCEs): Pass/Fail Result: Calculate In the world of employer-sponsored retirement plans, fairness and nondiscrimination are essential principles upheld by the IRS. One key requirement to ensure retirement benefits are equitably distributed is the Average Benefit Percentage Test. This test ensures…
In the world of employer-sponsored retirement plans, fairness and nondiscrimination are essential principles upheld by the IRS. One key requirement to ensure retirement benefits are equitably distributed is the Average Benefit Percentage Test. This test ensures that highly compensated employees (HCEs) do not receive disproportionate benefits compared to their non-highly compensated counterparts (NHCEs).
If you’re an HR professional, plan sponsor, or financial advisor, understanding and applying this test is crucial to maintaining a qualified retirement plan under IRS rules. The Average Benefit Percentage Test Calculator is a simple tool that helps you evaluate your plan’s compliance in a matter of seconds.
Formula
The formula for the Average Benefit Percentage Test is:
Average Benefit Percentage Test = (Average Benefit % of NHCEs) ÷ (Average Benefit % of HCEs)
To pass the test, the result must be at least 70%. This means that the average benefit percentage received by non-highly compensated employees must be at least 70% of the average benefit received by highly compensated employees.
How to Use the Calculator
Here’s how you can use the calculator efficiently:
- Enter the Average Benefit % for NHCEs:
This is the average percentage of compensation contributed or accrued under the retirement plan for all non-highly compensated employees. - Enter the Average Benefit % for HCEs:
This is the same metric calculated for highly compensated employees. - Click "Calculate":
The calculator will display whether the plan passes or fails the test based on the 70% threshold.
Example
Let’s assume:
- Average Benefit % for NHCEs: 4.2%
- Average Benefit % for HCEs: 5.8%
Now, divide NHCE by HCE:
4.2 ÷ 5.8 = 0.724 or 72.4%
Since 72.4% is greater than 70%, the plan passes the Average Benefit Percentage Test.
FAQs
1. What is the Average Benefit Percentage Test?
It’s an IRS nondiscrimination test used to ensure a retirement plan does not favor highly compensated employees over others.
2. Who are considered Highly Compensated Employees (HCEs)?
HCEs are typically employees earning over a specified IRS threshold (e.g., $150,000) or owning more than 5% of the business.
3. Who are Non-Highly Compensated Employees (NHCEs)?
Employees who do not meet the criteria for HCEs fall under NHCEs.
4. What’s the passing score for the Average Benefit Test?
The ratio of NHCE average benefit % to HCE average benefit % must be at least 70%.
5. What happens if a plan fails the test?
The plan could face disqualification unless corrective actions are taken, such as increasing contributions for NHCEs.
6. Is this test mandatory for all retirement plans?
It applies primarily to 401(k), 403(b), and defined benefit plans that must meet IRS nondiscrimination standards.
7. Can small businesses ignore this test?
Not if they offer a qualified retirement plan. Even small businesses must comply with nondiscrimination rules.
8. What benefits are included in the calculation?
It includes employer contributions, accruals under defined benefit plans, and any other retirement-related benefits.
9. Are elective deferrals included in the benefit percentage?
They can be, depending on the method used and the specific test being performed.
10. How often must this test be performed?
Typically, it is done annually, at the end of each plan year.
11. Can we use prior year data?
In most cases, current year data is used unless a safe harbor plan is adopted.
12. What are alternatives to passing this test?
Employers can adopt a safe harbor 401(k) plan which automatically satisfies certain nondiscrimination requirements.
13. What is the difference between this test and the ADP/ACP tests?
The ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) tests focus on salary deferrals and matching contributions, while the Average Benefit Percentage Test evaluates all benefits.
14. What if the HCE group is too small?
The test can still be run, but statistical sampling or expert actuarial input may be needed for accuracy.
15. Can this test apply to defined benefit plans?
Yes, it applies to both defined contribution and defined benefit retirement plans.
16. Is software required to do this calculation?
Not necessarily — it can be done manually or with a simple calculator like the one above.
17. How accurate does the data need to be?
Very accurate. Misreporting can lead to failed tests and compliance issues.
18. What corrective actions can be taken?
You may need to increase NHCE contributions or redesign the plan to pass the test.
19. Who performs the test usually?
It’s typically performed by the plan administrator, HR team, or a third-party administrator (TPA).
20. Can failing the test trigger audits?
It could, especially if it's not corrected and reported appropriately in Form 5500 or IRS inquiries.
Conclusion
The Average Benefit Percentage Test plays a critical role in ensuring retirement plan equity across your organization. It’s not just a technical IRS requirement — it’s a reflection of your company’s commitment to fair benefits for all employees. With the help of this Average Benefit Percentage Test Calculator, employers can quickly determine if their plan is compliant and take corrective action if needed.