Part $2$: Application of Coverage Tests

Scenario for Company X:

Company X sponsors a $401($k$)$ retirement plan with the following employee details:

$$ Total eligible employees: $100$

$$ Highly Compensated Employees $($HCEs$)$: $30$

$$ Non$-$Highly Compensated Employees $($non$-$HCEs$)$: $70$

Company X wants to ensure their retirement plan is compliant with the IRS rules on non$-$discrimination.

Coverage Details:

$$ Number of HCEs covered by the plan: $24$

$$ Number of non$-$HCEs covered by the plan: $45$

$$ Average benefit percentage for HCEs: $7\%$

$$ Average benefit percentage for non$-$HCEs: $4\mathrm{.}5\%$

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Questions

$2\mathrm{.}1.$ Percentage Test $($Safe Harbor Test$)$:

Determine if Company X$\text{'}$s plan meets the percentage test. Show all your calculations and provide a conclusion based on your findings.

$2\mathrm{.}2.$ Ratio Test:

Calculate the ratio test for Company X and determine whether the plan meets this requirement. Show your work and explain your reasoning.

Rate non$-$HCE: $45/70*100=64\mathrm{.}29\%$

Rate of HCE: $24/30*100=80\%$

Ratio test: $64\mathrm{.}29/80*100=80\mathrm{.}36\%$

Therefore, Company X passes the ratio test since the non$-$HCE participation rate is higher than $70\%$ of HCE participation. $80\mathrm{.}36\%>70\%$

$2\mathrm{.}3.$ Average Benefits Percentage Test:

Calculate the average benefits percentage test for Company X$.$ Does the plan meet this test? Provide all necessary calculations and a detailed explanation.

$2\mathrm{.}4.$ Corrective Actions:

If Company X fails any of the above tests, suggest at least two possible corrective actions that the company could take to ensure compliance with Section $410($b$)$ of the Tax Code.