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February 17, 2009

Average Benefit Test

Your Guide



Test used to determine whether minimum coverage requirements are satisfied under a qualified plan (qualified retirement plan)

A plan satisfies the average benefit test for the year , if it satisfies both the nondiscriminatory classification test of §1.410(b)-4 and the average benefit percentage test of §1.410(b)-5 for the plan year.

Referring Cite

IRC § 410(b)(2), Treas. Reg. §1.410(b)-2(b)(3),Treas. Reg. § 1.410(b)-4, Treas. Reg. §1.410(b)-5

Additional Helpful Information

  • The average benefit test can be used as an alternative to passing coverage testing, when the plan fails the ratio test
  • The requirements of the nondiscriminatory classification test are addressed in line IV.b.(l) of Worksheet 5 or in line V.b.(i) of Worksheet 5A.
  • The average benefit percentage test is satisfied if the average benefit percentage of the plan for the plan year is at least 70 percent. This determination is made on the basis of benefits provided not only under the plan, but also under other plans of the employer that are in the plan’s “testing group”
  • A plan’s average benefit percentage is determined by first calculating individual employee benefit percentages, then determining averages of these percentages for the group of NHCEs and the group of HCEs, and finally dividing the average determined for the NHCE group by the average determined for the HCE group. If the result is at least 0.70, the average benefit percentage test is satisfied.
  • The testing group consists of the plan for which the demonstration is submitted and every other plan of the employer that could be permissively aggregated with the plan under the rules described in Part III of Worksheet 5 or Part IV of Worksheet 5A. In determining whether plans could be permissively aggregated with for this purpose, the following special rules apply.
  • More in : Employee Benefit Plans: Explanation No 5 C. Coverage and Nondiscrimination Requirements: General Tests and Average Benefit Test

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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