Coverage asks whether enough non-highly compensated employees benefit relative to highly compensated employees. It is a different question from how much each person receives.
Who benefits, then how much?
A plan can have attractive contribution percentages and still have a coverage problem if too few NHCEs benefit. Section 410(b) looks at participation in the relevant plan component. Section 401(a)(4) addresses nondiscrimination in the contributions or benefits.
An employee being allowed to make 401(k) deferrals does not automatically mean that employee benefits under the employer profit-sharing component. Your provider must identify the relevant population and what counts as benefiting for each test.
A simple coverage calculation
Assume the testing population contains two HCEs and ten NHCEs, after applicable exclusions. Both HCEs receive the employer contribution. Seven NHCEs receive it.
| Group | Benefit / total | Percentage benefiting |
|---|---|---|
| HCEs | 2 / 2 | 100% |
| NHCEs | 7 / 10 | 70% |
| Coverage ratio | 70% ÷ 100% | 70% |
This meets the 70% ratio-percentage threshold for this simplified population. If only six NHCEs benefited, the ratio would be 60% and this route would not pass. Another permitted testing route may be available; failure of this ratio alone is not the end of every case.
Do not remove employees too early
Send the complete census and identify hire dates, terminations, hours and employment status. Let the provider apply the plan provisions and permitted testing exclusions. Deleting part-time or terminated people in advance can hide the very issue the test is supposed to find.
Related employers can also change the denominator. A second business may bring additional employees into the coverage analysis even when those employees are paid through a different payroll system.
How coverage can affect the budget
If an additional employee must receive an allocation, the employer’s funding changes. For example, adding a 5% contribution for a $50,000 employee adds $2,500. That may also alter benefits-based testing, so it is not always the only adjustment.
Ask for a reconciliation: total employees, excluded employees with reasons, HCEs and NHCEs in the test, and who benefits. This makes the coverage result understandable without needing to reproduce the entire test yourself.
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 §1.410(b)-2: minimum coverage
- 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.