What is the purpose of nondiscrimination testing in 401(k) plans?

Nondiscrimination testing in 401(k) plans aims to ensure that the plan does not disproportionately favor highly compensated employees over non-highly compensated employees. This testing is crucial because the Internal Revenue Service (IRS) has regulations in place to promote fairness and equity in retirement benefits.

The rationale behind this testing is to maintain a balance in how benefits are distributed among employees of varying salary levels. If a retirement plan is found to favor higher-paid employees, it may be at risk for penalties or disqualification. Nondiscrimination tests typically assess various factors, such as contribution rates and benefit levels, to ensure that all employees have access to equitable retirement plan benefits regardless of their compensation.

While the other options touch on important aspects of 401(k) plans, they do not directly address the primary purpose of nondiscrimination testing. For instance, ensuring all employees can enroll in the plan, maximizing employer contributions, or minimizing administrative costs may be relevant to the overall administration of 401(k) plans, but they are not the specific focus of nondiscrimination testing, which is fundamentally about equity and fairness in benefit distribution.