How do you calculate the ratio percentage given the NHCE and HCE ratios?

To calculate the ratio percentage using NHCE (Non-Highly Compensated Employees) and HCE (Highly Compensated Employees) ratios, the correct approach is to divide the NHCE ratio by the HCE ratio. This calculation is crucial for compliance testing under the 401(k) plan regulations, specifically for determining whether the plan maintains favorable coverage for NHCEs relative to HCEs.

The NHCE ratio represents the percentage of eligible non-highly compensated employees participating in the plan, while the HCE ratio reflects the percentage of eligible highly compensated employees participating. By dividing the NHCE ratio by the HCE ratio, you obtain a percentage that indicates the participation rate of NHCEs relative to HCEs. This ratio is important for ensuring the plan meets necessary nondiscrimination requirements, allowing for the assessment of whether NHCEs are provided equal benefits compared to their HCE counterparts.

This method is used frequently in compliance testing to determine if further corrective measures or adjustments are necessary to adhere to IRS guidelines.