Businesses have a lot to do at the end of their plan year, and one important task that cannot be overlooked is non-discrimination testing. Organizations which offer pre-taxed benefit plans (such as an FSA, HRA, and HSA) to their employees, must be able to prove an absence of favoritism towards “key employees,” or employees who are compensated higher than the majority, per IRS mandate.
To prove no favoritism exists for these employees, the IRS requires that organizations perform non-discrimination testing on an annual basis. The experienced employee benefits consultants at eBen work alongside organizations to conduct their yearly non-discrimination tests to ensure their benefits plans are equitable and accessible for all employees.
What Is Non-Discrimination Testing?
Non-discrimination testing is executed through a series of mathematically based testing methods, which quantifies and evaluates an organization’s level of fairness in relation to its benefits plans.
The three most widely used tests include the Actual Deferral Percentage (ADP) Test, the Actual Contribution (ACP) Test, and the Top-Heavy Test, which evaluates the equity of benefits plans based on different factors.
By implementing these non-discrimination testing methods, organizations can objectively demonstrate fairness within their benefits plans.
Organizations that fail to either complete or pass annual non-discrimination testing can potentially face tax penalties and plan disqualification, in the event of a future IRS audit.
eBen’s Non-Discrimination Testing Services
eBen consultants assess our clients’ benefits plan offerings to determine the specific testing methods that need to be performed. Once the required non-discrimination tests have been identified, we then assist with testing execution to ensure all methods have been completed successfully.
If an organization fails any of the non-discrimination tests performed, our experienced employee benefits consultants are able to pinpoint the deficiencies which resulted in a test failure and create a comprehensive plan to address the issues in order to meet necessary compliance requirements.
When Is Non-Discrimination Testing Conducted?
The results from non-discrimination testing are due by the last day of the benefits plan year, which means the exact date can vary based on when an organization’s plan went into effect the previous year. Businesses tend to have most of the data needed to complete it by that point, yet they still have sufficient time to correct failed tests without the need to reissue W2 forms.
Submitting testing results after the final day of the plan year has passed is not recommended because if the plan ends up being deemed discriminatory in some ways, it can create a very complicated tax situation for highly compensated employees. In addition, testing result submissions post-deadline also eliminates the organization’s ability to make changes to elections.
In some cases, mid-year testing may also be recommended to determine whether additional steps need to be taken to ensure a company will be able to pass the test by the end of the plan year.
Reach Out to the Employee Benefits Professionals
At eBen, our employee benefits compliance team knows how to navigate the complex web of regulations to ensure that your organization stays compliant and avoids penalties. Our “Making the Complex Simple” philosophy guides everything we do, while our broad understanding of the constantly changing regulations and laws enables us to help your business prepare for the future.
When you entrust the important task of non-discrimination testing to the professionals at eBen, your team will be free to focus on the bigger picture. For more information about how we can help you achieve compliance, give us a call at (910) 518-9338 or use the contact form on our website.