Nondiscrimination Rule
A nondiscrimination rule is a clause found in qualified retirement plans stating that all employees of a company must be eligible for the same benefits, no matter their position within the company. Nondiscrimination rules must be kept up even when retirement plans such as 401(k)s are amended or transferred to another trustee, according to ERISA guidelines. A company may offer non-qualified plans, meaning that contributions are not tax-deductible, that are discriminatory or selective in nature, in addition to standard qualified plans. A nondiscrimination rule is an ERISA-required clause of qualified retirement plans that mandate all eligible employees receive the same benefits. A non-qualified retirement plan, which does not fall under ERISA guidelines or have tax benefits recognized by the IRS, may be discriminatory or selective in nature. A nondiscrimination rule is a clause found in qualified retirement plans stating that all employees of a company must be eligible for the same benefits, no matter their position within the company.
What Is a Nondiscrimination Rule?
A nondiscrimination rule is a clause found in qualified retirement plans stating that all employees of a company must be eligible for the same benefits, no matter their position within the company. The rule keeps plans from being discriminatory toward highly-compensated employees and company executives. Nondiscrimination rules are required for a plan to be considered qualified under the Employee Retirement Income Security Act (ERISA).
Understanding Nondiscrimination Rules
Nondiscrimination rules must be kept up even when retirement plans such as 401(k)s are amended or transferred to another trustee, according to ERISA guidelines. A company may offer non-qualified plans, meaning that contributions are not tax-deductible, that are discriminatory or selective in nature, in addition to standard qualified plans.
An investment policy statement is recommended to serve as a guideline for investment decisions to be made. The statement may include comments on risk tolerance, investment philosophy, time horizons, asset classes and expectations regarding rates of return.
ERISA has requirements for vesting options as well. Plan benefits may require a vesting period before employees earn the right to the benefit if they leave the company. ERISA regulations limit the length of such a vesting period to a reasonable schedule.
IRAs Not Subject
Not all employer plans are subject to ERISA. For example, government retirement plans are exempt from ERISA. IRAs are not subject to ERISA because an individual retirement account (IRA) is not considered an employer plan. Also, nonqualified plans, which do not qualify for tax-deductible contributions, are not subject to ERISA.
For small businesses, a Simplified Employee Pension plan is basically an IRA set up by an employer so that it can contribute to employee retirement savings. Typically, these plans are not subject to ERISA regulations.
ERISA History
ERISA was enacted in 1974 to protect the rights of employees under retirement plans offered by their employers. In particular, this set of laws was put into place to address irregularities in the administration of certain large pension plans. In addition to its nondiscrimination rules stipulating that all plan participants must be treated equally, ERISA safeguards retirement funds from employer mismanagement.
The plan's trustee must manage plan assets and make decisions in the best interests of the plan participants. The trustee cannot sell assets to the plan or earn commissions from plan investments. Also, plan assets must be kept separate from company assets. As for investment options, fiduciaries for the plan must follow the Prudent Investor Rule discussed in the Handling Client Funds section.
Related terms:
401(k) Plan : How It Works & Limits
A 401(k) plan is a tax-advantaged retirement account offered by many employers. There are two basic types—traditional and Roth. read more
Court Order Acceptable for Processing (COAP)
A court order acceptable for processing (COAP) grants an ex-spouse or dependent of a federal employee rights to federal benefits they enjoyed. read more
Deferred Compensation
Deferred compensation is when part of an employee's pay is held for disbursement at a later time, usually providing a tax deferred benefit to the employee. read more
Employee Retirement Income Security Act (ERISA)
The Employee Retirement Income Security Act (ERISA) protects workers' retirement savings by ensuring fiduciaries do not misuse plan assets. read more
Investment Policy Statement (IPS)
An investment policy statement (IPS) is a document drafted between a portfolio manager and a client that outlines general rules for the manager. read more
Individual Retirement Account (IRA)
An individual retirement account (IRA) is a savings plan with tax advantages that individuals can use to invest for retirement. read more
Nonqualified Plan
A nonqualified plan is a tax-deferred, employer-sponsored retirement plan that falls outside of Employee Retirement Income Security Act guidelines. read more
Pension Plan
A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. read more
Plan Sponsor
A plan sponsor is a designated party—usually a company or employer—that sets up a healthcare or retirement plan for the benefit of its employees. read more
Prudent Investor Rule
The prudent investment rule requires a fiduciary to invest trust assets as if they were her or his own. read more