Employee benefits are one of the strongest tools employers have to attract and retain top talent. But to maintain their tax-advantaged status and to keep plans fair for everyone, those benefits need to pass non-discrimination testing.

Non-discrimination testing isn’t just an IRS box to check; it’s about ensuring that plans don’t disproportionately favor executives or highly compensated employees (HCEs) over the rest of the workforce. Done right, these tests protect your tax treatment, avoids penalties, and creates a more equitable workplace.

Why Non-Discrimination Testing Matters

Before diving into how non-discrimination tests work, it’s important to understand why they exist in the first place. The IRS created non-discrimination rules to ensure that tax-favored benefits don’t become a perk reserved only for executives or business owners. This means employers can’t just offer the most attractive options to those at the top, the opportunity must extend across the workforce.

The IRS requires non-discrimination testing for many common benefit plans, including:

If these plans are found to favor HCEs or key employees, the tax benefits for those employees may be lost, and employers could face IRS penalties. In other words, non-discrimination testing ensures that all employees have a fair shot at using the benefits provided.

What the Tests Look For

Non-discrimination testing may sound complicated, but at its core it’s simply checking whether your benefit plans treat all employees fairly. While each type of plan has its own specific requirements, most tests share common themes.

Non-discrimination tests typically focus on three areas:

  1. Eligibility – Are enough non-HCEs eligible to participate? For example, at least 70% of non-excludable employees must be eligible under the Health FSA test.
  2. Benefits – Are the benefits offered to HCEs the same as those offered to other employees? Plans may fail if executives can access perks not available to the broader workforce.
  3. Contributions and Participation – Are contributions and actual usage balanced? A plan could fail if HCEs contribute more, elect higher benefits, or receive a greater share of the plan value.

In short, non-discrimination tests are designed to flag whether a benefit plan favors a small group rather than being offered fairly across the board.

Timing and Best Practices

Knowing the rules is only half the battle. Employers also need to be intentional about when and how they test. The IRS requires that non-discrimination testing be performed annually and completed by the last day of the plan year. However, relying on a single test at the end of the year can leave you with little time to fix issues.

That’s why many experts recommend mid-year or “mock” testing. By testing early, you can identify potential problems, adjust plan design or contributions, and encourage more participation before it’s too late. This proactive approach not only reduces risk but also keeps your benefits strategy running smoothly.

Encouraging Broader Participation

One of the most common stumbling blocks in non-discrimination testing isn’t the complexity of the calculations; it’s getting enough participation from non-highly compensated employees (NHCEs). When only executives or higher-paid staff take advantage of certain benefits, the results can quickly tilt out of balance. The key to success lies in building awareness, removing barriers, and making benefits feel relevant to everyone.

Here are a few practical strategies employers can use to broaden engagement:

  • Communicate clearly and often: Employees can’t enroll in benefits they don’t fully understand. Go beyond a single open enrollment email by using multiple touchpoints, short videos, FAQ sheets, live Q&A sessions, or quick reminders throughout the year. Keep the message simple and focus on the question, “What’s in it for me?”
  • Offer meaningful choice: A single plan design rarely meets the needs of an entire workforce. Providing a mix of options, such as PPO and HDHP medical plans or pairing FSAs with HSAs, gives employees flexibility to select what best fits their situation.
  • Invest in financial literacy: Many employees opt out of benefits because they’re unsure how pre-tax savings or reimbursement accounts work. Offering easy-to-understand tools or workshops that explain the value of tax savings and budgeting for benefits can go a long way in increasing participation.

When employers focus on accessibility and awareness, they not only improve their chances of passing NDT but also create a benefits program that feels inclusive, valuable, and worth engaging in.

Beyond Compliance: Building Fairness

At the end of the day, non-discrimination testing is about much more than compliance paperwork. It reflects a company’s commitment to fairness and inclusivity. By ensuring that benefit plans are accessible and valuable to everyone, not just a select few employers, strengthens their culture, builds trust with employees, and demonstrates that their benefits are more than just a checkbox.

And remember: you don’t have to navigate this alone. Understanding the rules, running the non-discrimination tests, and making adjustments can feel overwhelming, but the goal is simple: To make sure your benefits are both compliant and meaningful for your team. Our role is to help employers and brokers cut through the complexity, stay compliant, and build benefit programs that work for everyone. Contact Flyte today to discuss how we can help simply non-discrimination testing.