Non-discrimination rules are enforced by the IRS to prevent highly-compensated and/or key employees from using reimbursement plans as tax-shelters. These rules prohibit discrimination in favor of highly compensated employees with regard to eligibility and participation in the plan. Failure to follow non-discrimination rules will result in the disqualification of all highly compensated employees and taxing of any funds dispersed to them.
What is Non-Discrimination Testing?
Non-Discrimination Testing is a series of calculations performed on demographical employee data provided by the employer. The purpose of these calculations is to determine compliance to the IRS Non-Discrimination Rules for ERISA eligibility based on ratios of highly-compensated employee benefit amounts to non-highly-compensated employee benefit amounts. A Non-Discrimination Test is evaluated on a pass/fail basis.