Compensation

Non-Discrimination Testing

Definition

What is Non-Discrimination Testing?

Non-Discrimination Testing is a set of IRS-required annual tests ensuring that employer-sponsored benefit plans such as 401(k) or health FSAs do not disproportionately favor highly compensated or key employees.

Featured snippet

Annual IRS tests ensuring benefit plans do not unfairly favor highly compensated employees.

In Practice

How Non-Discrimination Testing works?

Non-discrimination testing (NDT) refers to the IRS-required annual tests that verify retirement plans (401k) and certain other benefit plans do not disproportionately benefit highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). The primary tests for 401(k) plans are the Actual Deferral Percentage (ADP) test — comparing average deferral rates of HCEs to NHCEs — and the Actual Contribution Percentage (ACP) test for employer matching. If HCEs defer or receive matches at a significantly higher rate than NHCEs, the plan fails the test and must take corrective action — either distributing excess contributions back to HCEs (which creates taxable income for affected HCEs) or making corrective contributions to NHCEs to bring the plan into compliance.

By the numbers

Key Statistics

What the research says about employee engagement.

15-20%

Approximately 15 to 20 percent of 401(k) plans that are subject to non-discrimination testing fail the ADP test in any given plan year, with plans at small and mid-size companies with demographic concentration in HCEs being the most vulnerable to test failure.

55%

Safe harbor 401(k) plan designs — which require employer contributions meeting minimum thresholds — allow employers to bypass ADP and ACP testing entirely, a design choice made by approximately 55 percent of 401(k) plans to eliminate annual testing complexity and compliance risk.

10%

Corrective distributions to HCEs following NDT failure must be completed by March 15 of the following plan year to avoid a 10 percent excise tax — a deadline that requires plan administrators to complete testing and notify affected HCEs significantly in advance of the correction deadline.

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Also known as

Synonyms and Translations

Other ways this term appears across industries and languages.

Synonyms

NDT

ADP/ACP Testing

Benefit Plan Testing

401k Discrimination Testing

Translations

🇸🇦

Arabic

اختبار عدم التمييز

🇫🇷

French

Test de non-discrimination

🇮🇳

Hindi

गैर-भेदभाव परीक्षण

🇵🇰

Urdu

غیر امتیازی جانچ

🇵🇭

Tagalog

Non-Discrimination Testing

People may ask

People May Ask

Common questions about employee engagement.

What is non-discrimination testing?

It is a set of IRS-mandated annual tests that verify employer-sponsored retirement and benefit plans do not unfairly advantage highly compensated employees over others.

What plans require non-discrimination testing?

401(k) plans, health FSAs, dependent care FSAs, HRAs, cafeteria plans, and other IRS-qualified benefit plans are subject to annual non-discrimination testing requirements.

What happens if a plan fails non-discrimination testing?

Employers must take corrective action, which may include refunding excess contributions to highly compensated employees or making corrective contributions for others.

What is the ADP/ACP test in 401(k) testing?

ADP tests employee deferrals and ACP tests employer matching contributions, both ensuring the ratio between highly compensated and non-compensated participants stays within IRS limits.

How can employers avoid failing non-discrimination tests?

By adopting Safe Harbor plan designs, conducting mid-year projections, encouraging broader employee participation, and working with a qualified plan administrator.

Non-Discrimination Testing

What is Non-Discrimination Testing?

How Non-Discrimination Testing works?

Key Statistics

Synonyms and Translations

People May Ask

Related Terms