What Is 401k Nondiscrimination Testing?

401k nondiscrimination testing is a process that 401ks have to go through every year. This process is designed to ensure that upper level executives in a company are not the only ones that are contributing to a company 401k plan. This process looks at the difference between the contributions of highly-compensated employees and non-highly compensated employees.

According to the rules, a highly compensated employee is an individual that earns more than $110,000 per year or has at least a five percent ownership in the company over the course of the year. Anyone below that threshold qualifies as a non-highly compensated employee.

The nondiscrimination testing will look at the average contribution for all of the non-highly compensated employees and it will look at the average contribution for the highly compensated employees. If the difference between the two thresholds is greater than two percent, the 401k is considered to be unbalanced. At that point, they will adjust the contributions of the highly compensated employees in order to get the difference back to two percent.

This means that the highly coveted employees will have to take money out of their 401ks in order to get the balance back in order again.