If you’re an employer that sponsors a retirement savings plan, Non-Discrimination Testing (NDT) is an important administrative task you need to perform annually. Failing the test can result in serious financial consequences for the company. In this post, we’ll discuss what NDT is and how to conduct it. We’ll also go over what to do if your company fails the test and some tips to help your plan stay ERISA-compliant.
What is NDT Testing?
NDT testing is a set of tests designed to ensure that your 401k plan is in compliance with ERISA rules and regulations. It measures whether the plan is administered fairly and doesn’t overly benefit highly compensated employees (HCEs) or Key employees. There are three types of NDTs that you must complete annually, except for Safe Harbor plans which are exempt.
Why is NDT Required on an Annual Basis?
NDT was created to prevent company owners and highly compensated employees from unfairly receiving generous tax benefits. Because compensation and contribution levels change annually, it’s important to complete the tests every year to ensure the plan is ERISA-compliant.
What Happens if Your Company Fails the NDT?
Failing the NDT is common but requires immediate action to remedy the situation. Audit your employee classifications to ensure they’re correct. If your plan failed the ADP or ACP, one remedy is to make qualified, non-elective contributions to non-highly compensated employee plans. Here you’ll find remedies provided by the IRS.
Tips to Help Your Plan Stay ERISA-Compliant
If you can afford it, you can implement a Safe Harbor plan to avoid NDT requirements altogether. Also, choose an administrator with an informative dashboard and simple, clear interface to make it easy for employees to engage with their 401k. You can also provide non-highly compensated employees with continuing education on the importance of saving for retirement. Notify HCEs of their contribution limits and monitor contributions throughout the year, communicating any changes.
The easiest way to avoid NDT? Switch to a Portable Retirement Plan (PRP) like Icon, which is an IRA-based retirement plan that simplifies administration and reduces costs. PRPs are not subject to ERISA rules and regulations – that means no annual reporting and no NDT requirements.
The Bottom Line:
Even with diligence, it’s common for companies to fail their annual NDT. If this happens to you and your company, take immediate action to remedy the discrepancy and then consider offering a Portable Retirement Plan. A PRP is the most cost-effective way to offer employees the opportunity to save for retirement.