What is the purpose of the 50/40 test in retirement plans?

The 50/40 test in retirement plans is specifically designed to ensure minimum coverage for eligible employees under certain retirement plans, particularly under the requirements set forth in the Internal Revenue Code. This test is utilized to assess whether a sufficient percentage of employees in specified categories are covered by the retirement plan, which helps ensure that the plan does not disproportionately favor higher-paid employees over lower-paid employees.

By focusing on the minimum coverage requirement, the 50/40 test promotes fairness in retirement benefits, aiming for inclusivity and equitable access for all employees within the company. It requires that at least 50% of non-highly compensated employees be eligible to participate in the plan, or that at least 40% of eligible employees overall are covered by the plan. This maintains the integrity of the retirement savings system and helps protect the tax-advantaged status of the retirement plans.

The other choices, while relevant to retirement planning, do not accurately describe the specific purpose of the 50/40 test. Asset allocation, evaluating employee savings, and assessing pension performance pertain more to different aspects of retirement planning and do not reflect the core function of this coverage test.