Navigating the complexities of nondiscrimination testing (NDT) and nonqualified retirement plans can be daunting for businesses. Company-sponsored retirement plans can only be considered qualified if access to employer contributions, investment options and other rights don't discriminate in favor of highly compensated employees (HCEs).

The Internal Revenue Service (IRS) established a set of nondiscrimination testing (NDT) regulations, to help ensure all employees have equal access to qualified retirement plans. These tests evaluate different tax-advantaged employee benefit plans such as 401(k)s, flexible spending accounts (FSAs) and health savings accounts (HSAs).

NDT emphasizes financial equality in the workplace by helping ensure that HCEs aren't contributing significantly more or using benefits at a higher rate than non-highly compensated employees (NHCEs). Since contributions to these plans are tax-deductible, NDT prevents HCEs from getting unfair tax advantages by limiting their contribution potential compared to NHCEs.

Repeated NDT failures create a negative situation for a company and its employees. Financial strain, administrative burden and potential tax implications are significant drawbacks.

Avoiding NDT failure requires a proactive and strategic approach. Companies need to develop strategies for a more inclusive and compliant 401(k) plan, which can also minimize the risk of failing nondiscrimination tests. To learn more about how Gallagher can help you reduce the risk of future NDT failures, delve into our whitepaper.

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This material was created to provide information on the subjects covered, but should not be regarded as a complete analysis of these subjects. The information provided cannot take into account all the various factors that may affect your particular situation. The services of an appropriate professional should be sought regarding before acting upon any information or recommendation contained herein to discuss the suitability of the information/recommendation for your specific situation.

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