The term “covered employee” refers to which employees are subject to the automatic contribution arrangement and are required to receive the annual notice. Section C.6 is where you would indicate “covered employees”.
There are two options available: 1) all eligible employees, 2) only those with no election.
To permit the use of extending the time to distribute excess contributions and excess aggregate contributions to correct failed ADP or ACP tests by 6 months, you will want to choose “all eligible employees” in C.6.