Nondiscrimination testing is an annual test that must be completed to guarantee that all employees have access to 401(k) retirement plans. Fines, penalties, and bureaucratic difficulties could happen if you don’t follow IRS rules.
The 401(k) nondiscrimination test confirms that the company offers does not discriminate against highly paid employees. 401(k) retirement plans offer a significant tax credit to the United States government.
Image Source – Google
These tax breaks are so significant that the government doesn’t want 401(k) plans to benefit business owners or highly compensated workers (HCE) over non-highly compensated workers.
The promotion of HCE can be described as discriminatory. A series of annual tests is required to ensure the plan is non-discriminatory. Companies offering 401(k) pension plans must pass a non-discrimination test or, failing that, take the necessary corrective action. Failure of the NDT test may result in the plan losing qualifying status.
This test is mandated by the Employee’ Retirement Income Safety Act (ERISA), the applicable laws and regulations that cover nearly every aspect of employee retirement benefits and their administration.
Testing a plan ensures that highly compensated employees (HCEs) and/or other key employees do not receive disproportionate benefits when compared to non-highly compensated employees (NHCEs).
Various government agencies mandate ERISA. This could be the Department of Labor or Domestic Revenue. The IRS is responsible for non-discrimination checks. It defines and updates the requirements for HCE and, NCE.