What is nondiscrimination testing?

Nondiscrimination testing is an annual IRS-mandated evaluation of employee retirement, health, and welfare plans that ensures equal benefits for all employees, notwithstanding their position in the company. Nondiscrimination testing is part of the federal law ERISA (Employee Retirement Income Security Act of 1974), which requires a minimum investment in retirement and health care plans. While organizations can offer specific benefits to employees of different tiers, benefits covered by nondiscrimination testing must be offered equally to all personnel.  

The IRS relies on non-discrimination testing to: 

  • Check that all employees, not just key or highly-compensated employees receive equal, non-taxable benefits 
  • Uphold safe harbor provisions– which reduce or eliminate a company’s liability 
  • Ensure companies meet tax criteria 

Passing the non-discrimination testing demonstrates that the organization doesn’t discriminate between employees– affording each employee equal benefits. 

Why should HR leaders care about nondiscrimination testing?

HR leaders are expected to ensure appropriate employee benefits while adhering to federal law. Understanding the nondiscrimination laws can help HR leaders:

  • Avoid penalties and bureaucratic pitfalls 
  • Reflect fairness in all employees’ benefit plans
  • Navigate the regulations in a way that favors the company and its employees

What can HR leaders do to comply with nondiscrimination testing?

HR leaders can help their company pass the nondiscrimination testing by incorporating these practices:

  • Know the basics (at least). A fundamental understanding of nondiscrimination testing is essential. Knowing the nondiscrimination testing jargon, which tests their company will need to pass and when, and the IRS requirements can help HR professionals successfully steer their company through the process. 
  • Hire a qualified professional. While HR leaders do need to understand non-discrimination testing procedures, the organization should still hire a certified, competent consultant to walk it through the highly complex nondiscrimination testing process.
  • Explain the retirement plan. HR professionals should aim to inform and explain the retirement savings program to employees in a simple and digestible manner. Understanding why retirement savings is important can motivate employees to participate in the pension program. The more employees understand the concept, its significance, and how it works, the more on-board they’ll be. Addressing non-highly compensated employees is especially important because without their compliance the plan can risk failing nondiscrimination testing. 
  • Offer automation as an option in the retirement saving process. Automatic enrollment ensures that every employee partakes in the retirement program, thus increasing the chances of passing nondiscrimination testing. Employers can also institute a default automatic increase and investment option that can benefit employees by ensuring that their retirement investments increase annually. 

How can nondiscrimination testing improve company culture?

Adhering to the rigorous nondiscrimination standards can help maintain equal retirement plans for all employees. While building a nondiscrimination testing plan demands preparation and bureaucratic navigation, it’s a necessary step that contributes to building a company culture rooted in equality and justice.