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Breaking Down the Benefits of Non-Discrimination Testing

Breaking Down the Benefits of Non-Discrimination Testing
Posted on Tuesday, October 11, 2022 by Bruce Gillis
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Non-discrimination testing (NDT) may be complex, but this process can help employers achieve success with their compliance and establishing benefits equity in the workplace. 

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As more employers look to attract and retain talent, many are leveraging their benefits programs as an incentivization tactic. It’s no secret that benefits offer multiple financial benefits, including tax advantages. Sometimes, however, these benefits are not as equitable or advantageous to all employees. 

For instance, if you offer a dependent care FSA, your highly compensated employees may have no problem setting aside funds for that account, but an employee who makes $50,000 a year might not be able to contribute as much, if at all. In this instance, the income variable makes this benefit inaccessible. 

Non-discrimination testing is a compliance tactic employers should integrate with their regular benefits management strategy to ensure equity across their organization. Not to mention, this practice will avoid costly IRS penalties.

What is non-discrimination testing?

Non-discrimination testing is a compliance tool to assess income-based equity within benefits plans.  

While there are several different types of non-discrimination tests, the goal is the same: ensure that your benefits aren’t disproportionately favoring highly compensated employees. 

Regular testing looks at how many people are eligible versus how many enroll in and use the benefit. Especially from a financial aspect, it’s important to ensure as many employees as possible have access to these resources. 

Non-discrimination testing was introduced by the IRS as a means of ensuring equity and avoiding tax evasion. Essentially, anything you offer your employees that includes a tax benefit is applicable to non-discrimination testing. 

When is the best time for benefits teams to conduct non-discrimination testing? 

The short answer: anytime.  

The long answer: there are no hard dates from the IRS as to when NDT needs to be completed, nor is there an official benchmark.  

However, many benefits teams typically run their testing after their annual enrollment window (around the third quarter). The strategy here is that by this point in the year you: 

  • Have enough pay periods left to make adjustments 
  • Have a good enough idea of what the rest of your year will look like in terms of eligibility and enrollment 

If you plan to (or already do) include non-discrimination testing as part of your benefits compliance process, benefits professionals will want to ensure that they’re timing it to give themselves enough runway to make changes, but not testing so early into their year that they leave themselves open to needing to re-test again later.  

That sweet spot will look different for each company but aiming to test after AE can help you close in on the best opportunity for you and your team.

How to manage employee expectations if you fail NDT for your benefits compliance.

Communication is key.  

Almost always, failing your NDT means having to make adjustments that impact your highly compensated employees. Those adjustments can come in many forms, like retroactive adjustments or new limitations, but no matter how you adjust it, you still need to help your employees understand the what, when, why, and how behind it all.  

Taking steps to clear confusion often prevents employee frustration.  

The best way to manage expectations, though, is to implement regular testing into your organization’s benefits strategy so that you can reduce surprise issues, avoid massive changes, and bake long-term strategy in from the beginning.  

Still curious about non-discrimination testing? Watch the on-demand recording of Brews with Bruce to hear Bruce Gillis, Businessolver’s Head of Compliance, and Ben Conley, Partner from Seyfarth Shaw and long-time friend of the show, wax poetic about NDT. 

 

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