If the NHCE ratio is 32.2% and the HCE ratio is 46%, does this plan pass or fail the ratio percentage test?

To determine whether the plan passes or fails the ratio percentage test, it's essential to understand the context of the non-highly compensated employee (NHCE) and highly compensated employee (HCE) ratios. The ratio percentage test is primarily used to assess whether the benefits provided by a 401(k) plan are discriminatory in favor of highly compensated employees.

In this case, the NHCE ratio is 32.2%, and the HCE ratio is 46%. For a plan to pass the ratio percentage test, the HCE ratio must be close to the NHCE ratio in a way that supports compliance with the nondiscrimination rules. The safe harbor is generally that the HCE ratio should not exceed 1.25 times the NHCE ratio.

This means that we can calculate the maximum allowable HCE ratio as follows:

1.25 × NHCE ratio = 1.25 × 32.2% = 40.25%

The actual HCE ratio is 46%, which exceeds the allowable limit based on the NHCE ratio. Therefore, although it might seem that 46% indicates a higher involvement of HCEs, the contrast with the NHCE ratio is significant enough for the plan to be deemed failing the test.