Non-Discrimination Testing
Ensure your benefit plans comply with IRS requirements — so every employee has fair access and your plans maintain their tax-advantaged status.
What Is Non-Discrimination Testing?
Non-discrimination testing (NDT) is a series of IRS-mandated tests designed to ensure that employer-sponsored benefit plans do not disproportionately favor highly compensated employees (HCEs) or key employees over rank-and-file workers. These tests apply to Section 125 cafeteria plans, 401(k) plans, self-insured health plans, dependent care assistance programs, and other qualified benefit arrangements.
Employers who offer pre-tax benefits are generally required to perform these tests annually. Failing to test — or failing the tests themselves — can result in significant tax consequences and plan disqualification.
Types of Non-Discrimination Tests
Eligibility Test
Verifies that a sufficient percentage of non-highly compensated employees are eligible to participate in the plan. The plan must not set eligibility criteria that effectively exclude lower-paid workers.
Benefits & Contributions Test
Ensures that the benefits provided or contributions made under the plan do not disproportionately favor HCEs. The value of benefits must be comparable across employee groups.
Key Employee Concentration Test
Confirms that no more than 25% of the total benefits under the cafeteria plan are provided to key employees (officers, owners, and highly compensated individuals as defined by the IRS).
55% Average Benefits Test
Requires that the average benefit provided to non-highly compensated employees equals at least 55% of the average benefit provided to highly compensated employees under the plan.
Consequences of Failing Non-Discrimination Tests
When a plan fails NDT, the tax advantages that make the plan valuable can be partially or fully revoked. Understanding these consequences underscores why proactive testing is essential.
Plan Becomes Taxable
HCEs may lose their pre-tax treatment, meaning their benefit elections become taxable income. This can trigger unexpected tax bills for your highest-paid employees.
IRS Penalties & Back Taxes
Employers may be liable for additional payroll taxes on improperly excluded amounts, plus potential penalties and interest assessed by the IRS during an audit.
Plan Disqualification
In severe cases, the entire plan can be disqualified, causing all participants — not just HCEs — to lose their tax-advantaged status retroactively for the plan year.
Stay Compliant with Expert Non-Discrimination Testing
Catapult runs every required test for your benefit plans and provides actionable guidance if corrections are needed — before the IRS comes knocking.
Contact Catapult