Question

Hibiscus, Inc., has 150 eligible employees, of whom 12 are highly compensated employees (HCEs). Eight of the HCEs and 100 of the non-HCEs benefit from the employer's qualified retirement plan. The average benefit for HCEs is 8% and for non-HCEs is 6%. Does the plan satisfy the coverage tests?

A) Yes, the percentage test is satisfied with 72.46% of non-HCEs covered.
B) Yes, because the percentage test is satisfied; neither the ratio test nor the average benefits percentage test is required.

Answer 1

Hibiscus, Inc.'s retirement plan coverage satisfies the percentage test because 72.46% of NHCEs are covered, surpassing the IRS requirement of 70%. However, whether the average benefits test is satisfied cannot be determined with the information provided.

Step-by-step explanation:

The question concerns the eligibility of a retirement plan under nondiscrimination tests required by the IRS to ensure that the benefits of a qualified retirement plan do not unduly favor Highly Compensated Employees (HCEs) over Non-Highly Compensated Employees (NHCEs). In the scenario provided, Hibiscus, Inc. has 150 employees, with 12 HCEs. Out of the 138 NHCEs, 100 are covered by the plan. The plan's coverage can be checked against the IRS nondiscrimination tests, such as the ratio percentage test and the average benefits test.

To determine if the plan satisfies the coverage tests, you should first look at the percentage tests. This dictates that a certain percentage of NHCEs must benefit from the plan at a ratio proportional to the HCEs. The IRS requires that this percentage is at least 70%. Here, 100 out of 138 NHCEs are covered, which is approximately 72.46%. Since this is above the 70% threshold, the percentage test is satisfied. However, this information alone does not indicate whether the average benefits percentage test is satisfied, which also considers the level of benefits provided to each group.