Ensuring fairness in the distribution of employee benefits is a critical aspect of human resource management, particularly for employers offering tax-advantaged plans. Non-discrimination testing (NDT), mandated by the Internal Revenue Service (IRS), plays a pivotal role in preventing discrimination in benefit plans and is not merely a suggestion but a requirement.
What is Non-Discrimination Testing?
Non-discrimination testing rules, established by the IRS, are designed to prevent favoritism in benefit plans towards highly compensated or key individuals within a company. These tests assess whether tax-advantaged plans, such as those governed by Section 125, are discriminatory towards highly compensated employees (HCEs) or key employees.
Plans Requiring Non-Discrimination Testing:
Employers offering plans under Section 125, including Flexible Spending Accounts (FSAs), are obligated to undergo NDT. Additionally, testing is also required for Health Reimbursement Arrangements (HRAs) and Self-Insured Medical Plans (SIMPs), although they are not part of Section 125.
Why Does Non-Discrimination Testing Matter?
The IRS mandates NDT to ensure that there is no discrimination between HCEs/key employees and other staff members within a company. Compliance is crucial, as failure to meet IRS requirements may lead to employers and employees facing taxes on benefits and IRS penalties.
Testing Frequency and Timing:
NDT should be conducted by the last day of the current plan year and must include all employees employed during that period. To enhance compliance, it is recommended that employers perform testing either early or mid-year, allowing adjustments to be made if needed to pass the test by the year’s end.
Responsibility for Completing Testing:
Any individual with access to payroll information can complete the testing template. However, it is important to assign the role of “compliance” within the system to the designated individual to enable access to the testing software.