Non-Discrimination Testing is a regulatory requirement that ensures employee benefit plans, such as 401(k) retirement plans or health insurance, do not favor highly compensated employees over non-highly compensated employees. These tests help maintain fairness and compliance with IRS and Department of Labor rules by verifying that benefits are distributed equitably across all employee groups.
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Key Facts
- Purpose: Ensures fairness in benefit plans and prevents preferential treatment of top earners.
- Applicable Plans: Commonly applies to retirement plans (401(k), 403(b)) and certain health plans.
- Testing Types: Includes Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and Top-Heavy tests.
- Consequences: Failure may result in corrective contributions or plan disqualification.
- Frequency: Typically performed annually by plan administrators or employers.
1. What is non-discrimination testing?
A process to ensure employee benefit plans do not disproportionately favor highly compensated employees.
2. Why is non-discrimination testing important?
To maintain tax-qualified status of benefit plans and ensure equitable employee treatment.
3. What happens if a plan fails the test?
Employers may need to refund contributions or adjust benefits to meet compliance.
4. Who conducts non-discrimination testing?
Plan administrators or third-party service providers usually perform the testing.
5. How often is non-discrimination testing done?
Typically once a year, though timing can vary depending on the plan.
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