What are minimum coverage tests?

coverage minimum tests
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What are minimum coverage tests?

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Sometimes an employer wishes to exclude certain groups of employees from their qualified retirement plan. They may wish to exclude a certain class of employees, like all hourly employees or all salaried employees. In other instances, the employer may consist of a controlled group of companies and they may wish to include employees from Companies A and C but not Company B. The minimum coverage tests that determine whether an employer can exclude certain groups of employees are many and varied. To determine if a group can be excluded requires a great deal of information including complete and accurate ownership information and census data. As a sponsor of your plan, it is your responsibility to provide complete and accurate information, both at the inception of your plan and on an ongoing basis. If there are any changes in your company’s structure such as acquisition of a new affiliate, sale of an affiliate, ownership changes, etc., you must notify Pinnacle Financial Services immediately

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The minimum age and service requirements of the Internal Revenue Code (IRC) set specific limitations on the maximum age and service conditions that can be used to exclude employees from a qualified plan. Plans that cover all employees meeting a 1-year service and age 21 requirement will generally satisfy the minimum coverage rules of the IRC. However, all employees meeting these requirements do not have to be covered under the plan. Employers are generally permitted to pick and choose plan provisions to direct benefits to a select group of employees as long as that coverage is not discriminatory in favor of the HCEs. These are called the “minimum coverage” rules. Plans generally are required to demonstrate each year that they are in compliance with these minimum coverage rules by satisfying the IRC requirements.

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