When testing begins, employers want to feel confident that their plan can make the grade. Nondiscrimination testing (NDT) can sometimes feel like a year-end mystery. The plan operates throughout the year; employees make their elections, and then testing rolls around. The results come back, and everyone waits to see whether the plan passed or failed.
But what if employers didn’t have to wait until testing was completed to start thinking about potential problems?
September is a good time to take a step back and look at what happened during the year. While you can’t predict a final testing result simply by looking at the plan’s current demographics, certain changes can be warning signs that a plan deserves a closer look.
These red flags don’t mean a plan will fail. They simply mean it may be worth asking a few additional questions before the year comes to an end.
1. A Significant Increase in Highly Compensated Employees
One of the first things to consider is whether the employer’s workforce looks different than it did last year. A significant increase in highly compensated employees can change testing dynamics, particularly if several executives were hired, employees received significant promotions, or compensation changed substantially.
2. Significant Turnover Among Non-Highly Compensated Employees
Significant turnover among non-highly compensated employees can also change the testing population. A company may have the same plan document as last year, but if the people participating in the plan have changed, the testing results may change as well.
This is one reason “But we passed last year,” doesn’t necessarily tell the whole story. NDT is not simply a test of the plan document. The employee population and how that population participates in the plan matter too.
3. Participation Is Heavily Concentrated Among Highly Compensated Employees
Participation itself can be another red flag. An employer might look at its plan and see that a reasonable number of employees are participating, but that doesn’t necessarily tell the full story.
If participation is heavily concentrated among highly compensated employees while participation among non-highly compensated employees is relatively low, it may be worth taking a closer look at the applicable testing requirements.
4. Changes in Contribution Patterns
The same concept applies to employee contributions and benefit elections. If highly compensated employees are electing significantly greater amounts than other employees, that may warrant additional attention depending on the type of testing being performed.
Changes in contribution patterns are not unusual. Employees change coverage levels, family circumstances shift, compensation changes, and benefit elections vary from year to year. Even these ordinary shifts can affect the testing population.
5. Changes to the Plan Itself
Employers sometimes think of NDT only in terms of employee demographics, but plan design changes also play a role.
Did the employer change eligibility requirements? Add or remove benefit options? Change employer contributions? Introduce a new contribution structure?
Even a change that seems relatively minor from an administrative standpoint may affect how employees participate in the plan.
6. Major Changes to the Company
Major organizational changes can also raise questions. A merger, acquisition, significant expansion, workforce reduction, or change in employee classification can introduce an entirely different employee population or compensation structure.
When a company goes through a major change, it is worth asking whether anything about the plan or its participants has changed in a way that could affect testing.
7. The Plan Has Failed Before
Then there is perhaps the most obvious red flag: the plan has failed before.
A previous failure doesn’t mean the plan will fail again. However, past testing results can provide useful information about areas that may deserve attention.
If a plan has struggled with participation, contribution levels, eligibility classifications, or another aspect of testing in the past, it may be helpful to understand what caused the issue and whether anything has changed since then. A previous failure shouldn’t simply be filed away and forgotten once the correction has been made.
A Red Flag Doesn’t Automatically Mean There Is a Problem
The good news is that seeing a red flag doesn’t mean there is automatically a problem. NDT isn’t something where one concerning fact allows anyone to predict the final result. Looking for these warning signs simply helps identify situations that may deserve a closer look.
That is why September can be a useful time to start the conversation. Before year-end, ask a simple question: What has changed?
- Has the employee population changed?
- Has participation changed?
- Have contribution levels changed?
- Has the plan changed?
- Has the company changed?
- Has anything happened that makes this year different from the last?
The answers to these questions may help identify areas that deserve extra attention before testing is performed.
NDT doesn’t have to be a January surprise. Sometimes the best time to start thinking about testing is before testing actually begins.
Medcom can help employers and advisors take a closer look with nondiscrimination testing services designed to identify potential issues and provide clear, actionable results. Learn more about Medcom’s NDT services
