Nondiscrimination Testing

Virtually all employee benefits have some sort of tax advantage, which is typically coupled with a variety of rules that are designed to prevent highly-paid employees from receiving “too much” of any particular benefit.  These rules are often referred to as nondiscrimination tests.

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Why do we care?  You want to provide great benefits in a cost-effective manner.  You have some flexibility in tailoring your benefit offerings, but that flexibility is hemmed in by the various non-discrimination tests.  We understand the tests and can help you design your benefits in compliant ways.

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Examples of various nondiscrimination tests:

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• Individual benefit limit (2022 figures)

  • Maximum 401(k) contribution: $20,500; $27,000 for those 50 and older

  • Maximum retirement benefit:  $61,000; $67,500 for those 50 and older

• Benefits provided to a fair cross-section of employees

  • In a 401(k) plan, the percentage of the non-highly paid employees who can make 401(k) contributions must be at least 70% of the percentage of highly paid employees who can make 401(k) contributions.  In other words, if 100% of the highly paid can contribute, at least 70% of the non-highly paid must also be eligible to contribute.  If 60% of the highly paid can contribute, at least 42% (60% x 70%) of the non-highly paid must be eligible to contribute.

  • A similar mathematical test applies to the employees who are eligible for coverage by a self-funded medical plan.

• The benefits of the highly paid are limited by the benefits provided to the non-highly paid.

  • The 401(k) contributions of the highly paid cannot be too much larger than those of the non-highly paid [commonly referred to as the ADP test].

  • In a self-insured medical plan, any benefit that is provided to a highly paid participant must be provided to all non-highly paid participants.