Minimum Plan Participation Requirement Review

Nondiscrimination testing has many facets. One of them concerns minimum participation. A recent blog entry provides a refresher concerning the minimum participation requirements. 

In “Minimum Plan Participation: With or Without You,” consultant firm DWC in its blog looks at those requirements, which it says “simply look at head count.” But they illustrate that while the rules may not be as complicated as those governing other aspects of nondiscrimination rules, they are no less important than any of the rest of them. 

The minimum participation rules, says DWC, require the following. 

Otherwise Eligible Employees. In general, otherwise eligible employees (OEEs) include employees who have met the age and service requirements of the plan. 

Specific Number or Percentage. In most cases, says DWC, the minimum participation rules require that 40% of the OEEs receive a minimum benefit. However, they note, if:

• there are only two OEEs, both must receive the meaningful benefit; and
• there are at least 125 OEEs, at least 50 of them must receive a meaningful benefit. 

DWC adds that despite statistics showing that the average family has 2.4 children, the minimum participation test does not allow fractions of a person. Therefore, they say, the 40% calculation must be rounded up to the next whole person.

Meaningful Benefit. DWC calls the rules concerning meaningful benefits “a much deeper rabbit hole” than one might expect. Usually, they say, benefits will be sufficiently meaningful to enough OEEs in order to satisfy the 40% requirement if there are allocations of 3%-5% of plan compensation. They add that if certain demographic conditions exist, the 40% requirement may be satisfied if the plan provides a flat dollar amount to the non-owner employees.

Note of Caution 

DWC adds a caveat. They note that if a plan excludes groups of employees who to not help the test, it may reduce funding costs and administrative expenses, and may also be able to avoid Pension Benefit Guaranty Corporation (PBGC) coverage. But there can be a down side to such a strategy, they warn—exemption from PBGC coverage can limit the tax deductions that can be taken, and that, in turn, can affect a funding strategy.