Non-Discrimination Testing: The Basics

What is Non-Discrimination Testing?

• It is a test to show there is no discrimination between the benefits given to highly compensated employees (HCEs)/key employees and other employees at the company.
• No discrimination means that there is fairness between all employees in terms of eligibility, employer contributions, or benefits of the plans.

What is a HCE?

• There are two tests for determining if an employee is an highly compensated employee (HCE) – an ownership test and a compensation test. If he or she satisfies either of the two tests, they are an HCE.

Why is it important?

• The IRS mandates testing to make sure that there is fairness in benefit plans among all employees despite the job an employee provides at a business. If a company fails to pass the test, it could face fines and penalties.
• Testing is required for Medical FSAs (flexible spending accounts), Dependent Care Accounts, and Pre-tax of Premiums.

When should the test be given?

• The test has to be administered by the last day of the current plan year to all employees who were employed during that plan year.
• Ideally the test should be performed early in the year so any corrections to payroll can be made to payroll.  
• Companies may also want to take another look at the test in November if the company has had significant change in employee population or HCE’s.
• If your company takes a non-discrimination test early in the year and doesn’t pass, Get Benefits can help correct so you’ll be on track by the end of the plan year.

About the test:

• There are many options of tests to use, but all of them should focus on three areas:
• Are there enough non-HCEs are eligible for a plan?
• Do the HCEs or key employees are able to get more benefits than other employees?
• Do the HCEs or key employees take more benefits under the plan than other employees.

Non-discrimination testing can feel like a daunting task, but by testing earlier in the calendar year and taking the time to make the necessary adjustments, it can be made manageable. Get Benefits can help you through this correction process to help ensure you pass.

Read on for more details on what the test entails and what happens if you do not pass.