The Internal Revenue Code provides that a qualified plan cannot discriminate in favor of highly compensated employees.  Under Code Section 401(a)(4), the contribution must be available on a nondiscriminatory basis to a certain percentage of non-highly compensated employees relative to the highly compensated employees.

This nondiscrimination is determined by taking the availability ratio for the non-highly compensated employees divided by the availability ratio for the highly compensated employees.  If the resulting ratio does not pass the safe harbor percentage under the Regulations, then the plan must either go on to the facts and circumstances test or the benefit is deemed discriminatory. 

For more questions and details on nondiscrimination, please contact your Nyhart consultant.

This article was last updated on March 2, 2012