Understanding non-discrimination testing
The information detailed below is provided to help you, the Plan Sponsor, better understand your obligations regarding the annual nondiscrimination testing requirements associated with your retirement plan. It is our desire to assist you as you guide and direct your retirement plan to meet the required guidelines.
- What is Nondiscrimination Testing? To help ensure that Plan Sponsors extend the benefits of their retirement plan to lower paid employees, ERISA limits the maximum deferrals and employer contributions that can be made by or on behalf of your organization's higher paid employees.Nondiscrimination testing looks at the relationship between the elective deferrals and the employer contributions of Highly Compensated Employees (HCE) and the elective deferrals and the employer contributions of Non-Highly Compensated Employees (NHCE). If a disparity outside of the allowed limits exists, corrective actions are required. The detailed information below provides the IRS's definition of an HCE.
- Who has to perform Nondiscrimination Testing? Retirement plans that are subject to ERISA must perform annual nondiscrimination testing of their retirement plan if the plan included any HCEs during the plan year. If the plan did not include any HCEs during plan year, no testing is required.If you are not sure if your retirement plan is subject to ERISA, check your Plan Document. Click here for a summary of ERISA and Non-ERISA definitions.ERISA Plans are 403(b)(7) Non-Church Plans with employer contributions. All 401(k) plans are subject to ERISA. These plans are required to carry an ERISA Fidelity Bond.Non-ERISA Plans are 403(b)(9) Church Plans that have not affirmatively elected to be covered by ERISA. (Few church plans self-elect to be covered by ERISA.) Non-ERISA Plans also include 403(b)(7) Non-Church Plans that do not include employer contributions and have "limited employer involvement" as defined by the Internal Revenue Code. Non-ERISA plans are not required to carry an ERISA Fidelity Bond.
- When does Nondiscrimination Testing need to be performed by? The nondiscrimination testing and the corrective actions associated with failed testing (if applicable) must to be completed within 2½ months following the close of the plan year. For example, if your plan year ends on December 31, the testing and corrective actions need to be completed by March 15 of the following year. Otherwise excise penalties may exist.
Required Plan Non-Discrimination Testing
To help ensure that you extend the benefits associated with your retirement plans to lower paid employees, ERISA limits the maximum deferrals and employer contributions that can be made by or on behalf of your organization's higher paid employees.
Nondiscrimination testing looks at the relationship between the elective deferrals and the employer contributions of HCEs and the elective deferrals and the employer contributions of NHCEs. If a disparity outside of the allowed limits exists, corrective actions are required.
Highly compensated employees, for the 2012 plan year, are defined as those staff members who earned $110,000 or more in 2011 (the "lookback year"). This HCE determination amount may change from one year to the next as determined by the federal government cost of living adjustment (COLA). For current "HCE Threshold" limits click here.
If your retirement plan is subject to ERISA and your organization employs any staff members who qualified as HCEs during the "lookback year", nondiscrimination testing is required at the end of the plan year. If your organization is not subject to ERISA or is subject to ERISA but does not include any staff members who qualify as HCEs during the lookback year, than non-discrimination testing is not required.
The nondiscrimination testing needs to be completed within 2½ months following the close of the plan year. For example, if your Plan year ends on December 31, the testing needs to be completed by March 15 of the following year. Otherwise, excise penalties may exist.
In the event of an IRS audit of your retirement plan, documented nondiscrimination testing results will need to be shown to the audit team if your Plan included any HCEs for the plan year under review.
For any questions related to required nondiscrimination testing, please contact our Plan Sponsor Service team at (888) 879-1376 or by email.