Section 401(a)(4) asks whether the plan’s employer contributions or benefits improperly favor highly compensated employees. Different percentages can be permitted; an untested spreadsheet is not a determination.
What does the test measure?
For a new comparability design using cross-testing, the provider compares employer contributions on an equivalent-benefits basis. It is checking the distribution of retirement benefits across HCEs and NHCEs, rather than simply asking whether everyone received the same dollars.
HCE status is a defined tax classification, not a synonym for “owner” or “manager.” Ownership, prior-year compensation and applicable elections can affect it. A well-paid nonowner may be an HCE, while a job title by itself tells you little.
Follow a proposed allocation through the review
| Step | Illustrative question | What it establishes |
|---|---|---|
| Allocation | Owner: 15%; three employees: 5% | The requested dollars and percentages |
| Gateway | Is each relevant NHCE at the required 5%? | The minimum-allocation condition |
| Benefits-based testing | Do the HCE rate groups satisfy the applicable tests? | Whether this comparison supports the design |
| Other checks | Coverage, limits, top-heavy, plan terms | Whether other constraints change the answer |
An owner receiving $45,000 and staff receiving $7,500 may look attractive. If one rate group does not pass, the provider may model more employee contributions or a different owner target. The economic comparison needs to be updated with those revised dollars.
Why there can be more than one answer
Testing can involve different permitted approaches and assumptions. A provider might use the ratio-percentage route or, where available, the average-benefit route. The latter involves more than a single 70% average; the other applicable coverage and classification conditions still matter.
A little more detail
An EBAR is an equivalent benefit accrual rate. A rate group includes an HCE and employees meeting the applicable comparison rate. These are testing constructs, not the allocation groups written into the plan.
What should the final report tell you?
- The plan year, census version, compensation definitions and contribution sources used.
- The final allocation by person, including amounts already deposited.
- The testing method, assumptions and results for the relevant rate groups.
- Any additional tests or document changes handled separately.
Ask a practical question: “Are these the final amounts we can instruct the recordkeeper to allocate, or is this still a design illustration?” A pass applies to the inputs and scope reviewed; it does not permanently certify the plan for future years.
Explore the next step
Try the free scenario calculator with hypothetical inputs, or compare more allocation examples. The methodology guide explains what the calculator does and does not test.
Sources & further reading
- Treasury Regulation §1.401(a)(4)-2: contributions and rate groups
- Treasury Regulation §1.401(a)(4)-8: cross-testing and the gateway
- Treasury Regulation §1.410(b)-5: average benefit percentage test
- Internal Revenue Code §414: related employers and special rules
Educational content updated September 18, 2026. Examples are fictional; they illustrate funding choices and do not constitute final testing or plan-specific advice.