Nondiscrimination testing (NDTs), in the simplest terms, are an annual test that is required to ensure that all employees receive 401(k)retirement plans. They are not only for business owners, but also highly-paid employees. Failure to comply with the IRS standards could result in fines, penalties and bureaucratic headaches.
401(k) nondiscrimination testing confirms that the 401(k), which your company offers, does not discriminate against highly-paid employees.
The 401(k)retirement plans offer significant tax benefits to the United States government. These tax benefits are so significant that the government doesn't want 401(k), plans to benefit business owners or highly-compensated workers (HCEs), over non-highly-compensated employees, A.K.A us.
Favoring HCEs can be called discriminating. A series of annual tests is required to ensure that the plan does not discriminate. The company that provides 401(k)retirement plans must pass the nondiscrimination testing or, if they fail, take the necessary remedial steps. Failures in NDT testing may result in plans losing their qualified status.
Information about NDTs, ERISA and the IRS
These tests are required by The Employee Retirement Income Safety Act (ERISA), which is a set law and regulation that covers almost all aspects of employee retirement benefits and their administration.
Various government agencies enforce ERISA. This could be either the Department of Labor or the Internal Revenue Service. The IRS is responsible for nondiscrimination testing. It sets the definitions and updates the requirements for HCEs, NHCEs and NHCEs.