The backbone of nondiscrimination testing, "general nondiscrimination," says that plans can't unduly discriminate in favor of highly paid employees over non-highly paid employees with respect to contributions and availability of other benefits, rights, and features. Also, plan amendments and plan terminations must not be unduly discriminatory.
The same plan(s) tested together or separately under minimum coverage must satisfy the general nondiscrimination requirements. A plan can be tested quarterly; on the last day of the year (counting everyone employed at any time during the year); or on a single day during the plan year ("snapshot" testing). However, if there haven't been any significant changes since the last test date, the test can take place as seldom as once every three years ("three-year testing").
For the general nondiscrimination test, you must separately look at the following three aspects of your plan:
- Contributions. To test whether contributions to a noncontributory plan are nondiscriminatory in amount, you can rely on a safe harbor or perform the general test. To pass the test for contributions, a contributory plan must satisfy the "matching test" or qualify under one of the design-based safe harbors.
- Benefits, rights and features. Optional forms of benefits and other rights and features must be made available on a nondiscriminatory basis. The phrase "optional forms of benefits" means any type of distribution option available under the plan. Early retirement options, lump-sum payout options, as well as standard lifetime annuity payouts are all examples of optional forms of benefits.
"Right or feature" generally means any aspect of the plan available to participants and of more than insignificant value. Examples include investment options, transfer options, and loan provisions. For contributory plans, the right to each rate of matching contribution and the right to make each rate of elective contributions or after-tax contributions are also rights or features.
- Plan amendments and terminations. Review your plan design to ensure that the nature and timing of any plan amendments are nondiscriminatory. Amendments include plan establishment or termination; any change in benefits, rights, or features; change in contribution rates; or grants of credit for prior service. Whether a plan meets the test will depend on facts and circumstances. If the timing of the amendments has a discriminatory impact, you must redesign the plan.
