Non-Discrimination Testing (Benefits)
Definition
IRS-required testing to ensure employer-sponsored benefits don’t disproportionately favor highly compensated employees.
What is Non-Discrimination Testing?
To maintain tax-advantaged status for benefits (e.g., Section 125, 401(k)), employers must prove that benefits are equitably offered to all employees, not just executives or top earners.
Why is Non-Discrimination Testing Important for Employers?
Regular testing is key for:
- Preserving tax deductions
- Maintaining favorable tax treatment for employee benefits
- Keeping benefit plans compliant and qualified under IRS rules
FAQs
What is the purpose of non-discrimination testing in benefits plans?
It confirms that health, retirement, and other benefit plans do not favor highly compensated employees over others, in compliance with IRS rules.
What types of plans require non-discrimination testing?
Section 125 cafeteria plans, 401(k) plans, and certain self-insured health plans are all subject to this requirement.
What happens if a plan fails testing?
Benefits received by highly compensated employees may become taxable, and the plan could lose its tax-advantaged status.
How ExtensisHR Can Help
We perform annual non-discrimination tests for:
- Section 125 (Cafeteria Plans)
- Group health plans
- 401(k) and retirement plans
We also help restructure plans to maintain compliance.