What are Section 401(b) tests primarily intended for?

Section 401(b) tests are primarily intended to conduct non-discrimination and coverage tests for retirement plans. These tests ensure that a retirement plan benefits all employees fairly, without discriminating between highly compensated employees and non-highly compensated employees. By adhering to these tests, employers demonstrate that they provide equitable benefits across different employee classifications, which is crucial for maintaining the tax-qualified status of the retirement plan.

Non-discrimination tests are required by the Internal Revenue Code to prevent situations where plans provide disproportionately higher benefits to highly-paid employees at the expense of lower-paid employees. Coverage tests further ensure that a significant portion of the workforce is included in the retirement plan, safeguarding against potential abuses where only select groups (e.g., executives) could benefit.

While measuring employee satisfaction, assessing plan costs, or evaluating company financial performance are important aspects of overall human resources and financial management, they do not specifically align with the purpose of the Section 401(b) tests, which is focused on compliance regarding equity and non-discrimination in benefits provided to employees.