Qualified Plan Non-Discrimination Testing: Protecting Compliance, Fairness, and Fiduciary Responsibility

Qualified Plan Non-Discrimination Testing: What Employers Need to Know

Retirement plans are one of the most valuable benefits employers offer, but they also carry significant regulatory responsibility.

Each year, qualified retirement plans must undergo Non-Discrimination Testing (NDT) to ensure the plan does not disproportionately benefit Highly Compensated Employees (HCEs) over Non-Highly Compensated Employees (NHCEs). While it may sound technical, this testing plays a critical role in maintaining both compliance and fairness.

What Is Non-Discrimination Testing?
Non-Discrimination Testing is required by the IRS to confirm that employer-sponsored retirement plans operate in a way that is equitable across employee groups.

Depending on your plan design, testing may include:

• ADP Test (Actual Deferral Percentage) – Compares salary deferrals of HCEs vs. NHCEs
• ACP Test (Actual Contribution Percentage) – Evaluates employer matching and after-tax contributions
• Top-Heavy Testing – Ensures key employees do not hold more than 60% of total plan assets
• Coverage Testing – Confirms the plan covers a sufficient percentage of non-highly compensated employees

Failing these tests does not mean your plan is “bad” — but it does require correction to maintain qualified status.

Why This Matters to Employers
Non-Discrimination Testing is not simply an administrative task. It directly impacts:

✔ Compliance & IRS Qualification

Failure to correct testing issues can jeopardize the plan’s tax-qualified status.

✔ Executive Contributions

If a plan fails, Highly Compensated Employees may receive corrective distributions or face contribution limits.

✔ Fiduciary Responsibility

Plan sponsors have a duty under ERISA to operate plans prudently and in accordance with regulations.

✔ Employee Trust

Retirement plans are a cornerstone of total rewards strategy. Fairness and transparency matter.

Common Reasons Plans Fail

• Even well-designed plans can run into issues. Some of the most common triggers include:
• Low participation rates among NHCEs
• Workforce demographic shifts
• Inadequate employer contributions
• Plan design misalignment
• Rapid compensation growth among HCEs

Often, failure is not about negligence, it is about design and strategy.

Correction Options
If a test failure occurs, employers typically have several correction pathways:

• Refund excess contributions to HCEs
• Make Qualified Non-Elective Contributions (QNECs) to NHCEs
• Adjust employer contribution structures
• Implement Safe Harbor plan design

The key is timely action. Proactive review reduces disruption.

The Strategic Approach: Plan Design Over Reaction
The most effective retirement strategies do not wait for year-end results.

We encourage employers to:

• Review workforce demographics annually
• Monitor participation trends throughout the year
• Evaluate Safe Harbor alternatives when appropriate
• Document review and oversight as part of fiduciary governance
• Benchmark plan design and competitiveness

Non-Discrimination Testing should be part of a larger, documented fiduciary process — not a surprise event.

Compliance Is a Leadership Discipline
Retirement compliance is not about checking boxes. It is about building a sustainable plan structure that supports employees while protecting the organization.

When compliance and retirement strategy work together, employers gain:

• Predictability
• Reduced risk
• Stronger employee engagement
• Greater fiduciary confidence

If you would like to review your current plan design, testing results, or governance process, our team is happy to walk through a structured assessment with you.

Because compliance isn’t reactive. It’s strategic.
Reach out to our Director of Retirement Services for assistance:
Andrew May | CFP®AIF® | Innovative Investment Fiduciaries
Director of Retirement Plan Services
amay@iifria.com