What does the early participation test include regarding NHCEs and HCEs?

The early participation test is a specific evaluation within the context of 401(k) plans that ensures compliance with nondiscrimination requirements established by the IRS. This test assesses whether a plan is providing equitable access to benefits for both non-highly compensated employees (NHCEs) and highly compensated employees (HCEs).

The correct answer is particularly focused on including all HCEs while only considering those NHCEs who meet the eligibility criteria set by the plan. This means that as long as an NHCE is eligible to participate in the 401(k) plan, they should be included in the early participation test. By including all HCEs, the test ensures that the highest earning employees are accounted for, reflecting on the plan's participation rates and ensuring the plan does not disproportionately favor HCEs over NHCEs.

The reasoning behind focusing on all HCEs is rooted in regulatory compliance. By ensuring that every highly compensated employee is evaluated, it provides a clearer picture of any participation disparities that could exist within the plan. This is vital for maintaining the balance and fairness of retirement benefits offered to all employees.

In contrast, other answer options might misinterpret the inclusion criteria of the test or limit the groups incorrectly. For instance, only selecting NH