What determines whether a plan passes the ratio percentage test?

The ratio percentage test is an important aspect of ensuring a 401(k) plan meets nondiscrimination requirements, specifically when evaluating contributions made by highly compensated employees (HCEs) versus those made by non-highly compensated employees (NHCEs).

The correct answer focuses on comparing the contribution rates of NHCEs to those of HCEs. This comparison is essential because the ratio percentage test is designed to determine if the plan is structured in a way that does not disproportionately favor HCEs over NHCEs. By examining this ratio, plan administrators can ensure compliance with federal regulations that aim to promote fairness in retirement savings opportunities across varying employee compensation levels.

In summary, the success of the ratio percentage test hinges on the careful analysis of contribution levels between NHCEs and HCEs, ensuring that the retirement plan remains equitable and compliant with regulatory standards.