Do I need to be a highly compensated employee to participate in a retirement plan?

No, eligibility for participation in a corporate retirement plan is not solely reserved for highly compensated employees. In fact, it is open to all eligible employees and every employer has to show evidence that there is no discrimination in favor of highly compensated employees in order to take advantage of the favorable income tax treatment that qualified retirement plans enjoy.

Retirement Plan Regulation

The Internal Revenue Code and federal legislation such as the Employee Retirement Income Security Act (ERISA) of 1974 and the Pension Protection Act of 2006 have introduced certain standards that help protect the rights of the participants in corporate retirement plans.

In order for a retirement plan to be considered a qualified retirement plan and benefit from the tax advantages qualified plans offer, certain minimum coverage requirements need to be met. All eligible workers, not only the highly compensated employees, must be offered the opportunity of enrolling in the company's retirement plan.

There are a few minimum coverage tests one of which a qualified plan must satisfy:

• The ratio test determines the ratio between the highly compensated and the non-highly compensated employees covered under the retirement plan. As a rule, the percentage of non-highly compensated employees must be a minimum of 70 percent of the percentage of highly compensated participants in the plan.
• According to the percentage test, a minimum of 70 percent of all non-highly compensated employees must be covered under the company's retirement plan.
• Under the average benefits test, the average benefit of the highly compensated employees must not exceed 30 percent of the average benefit for all non-highly compensated plan participants. Another requirement of the average benefit test is that the retirement plan does not discriminate against non-highly compensated employees on the basis of earnings.

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