True or false: To calculate the ratio percentage, you divide the HCE ratio by the NHCE ratio.

The correct understanding is that when calculating the ratio percentage for Highly Compensated Employees (HCEs) and Non-Highly Compensated Employees (NHCEs), you actually compare the ratios as defined, but not by simply dividing the HCE ratio by the NHCE ratio. Instead, the method involves calculating the percentage of contributions or benefits earned by HCEs and NHCEs relative to their compensation, and then analyzing if the plan meets the non-discrimination rules set forth by the IRS.

The intent behind this calculation is to ensure that the plan benefits do not disproportionately favor HCEs over NHCEs, which is vital for maintaining the qualified status of the 401(k) plan. Simply dividing the HCE ratio by the NHCE ratio does not provide an accurate representation of this comparison and would not lead to the necessary compliance evaluations. Thus, the statement is false.