Article

Don't overlook nondiscrimination testing for your benefits plans

Oct. 17, 2024

As the year draws to a close, many employers are busy wrapping up their annual duties. Amidst the commotion, it’s crucial to not overlook a key compliance requirement — nondiscrimination testing for your benefit plans. This essential process ensures that your plans do not disproportionately favor highly compensated and key employees over others.

Nondiscrimination testing is particularly relevant for Code §125 cafeteria plans, Code §105(h) self-insured health plans and Code §79(d) group term life. The primary goal of this testing is to identify and rectify any plan operations that might inadvertently favor certain employees, thereby ensuring fairness and compliance with federal regulations. The process includes gathering relevant data to assess both the mathematical and subjective tests to arrive at a pass or fail outcome.

To navigate this complex process, it’s wise to collaborate closely with your benefit plan advisor to determine what plans must be tested. They can also help to determine the most effective approach to conducting the tests and who they will be performed by, such as your third-party administrator. This impartial perspective can provide valuable insights and recommendations based on the outcomes, helping you maintain compliance and fairness within your organization. The rules and calculations are complex, and the process can be time consuming. Partnering with a provider that has a deep understanding of the regulatory landscape and is willing to advise on corrective actions can be a valued asset.

While regulations do not specify the exact timing for conducting nondiscrimination testing, strategic timing can significantly minimize potential impacts. One effective approach is to perform testing early in the plan year. By doing so, any necessary adjustments to benefit amounts can be made with minimal disruption to plan participants. Additionally, conducting a second round of testing at the end of the year ensures ongoing compliance throughout the plan year. Although the results of these tests are not reportable, it is prudent to maintain evidence of the testing outcomes and any corrective actions taken.

Year-round awareness for employee benefit managers is crucial. As benefit plan designs evolve, it’s important to avoid structuring plans in ways that disproportionately favor highly compensated employees. Additionally, implementing effective employee education strategies can help all employees understand the value of their benefits, thereby increasing participation among lower-compensated employees.

When a plan fails, it can lead to costly corrections and create dissatisfaction with some of the most valued employees. Often, test failures occur because highly compensated employees have more disposable income and a deeper understanding of the benefits’ value. By engaging employees outside of the annual enrollment period, you can generate interest from all employees and proactively address potential issues stemming from apathy.

By taking these steps, you not only adhere to regulatory requirements but also foster a more equitable workplace. So, as you finalize your year-end tasks, make sure nondiscrimination testing is checked off your list!