According to the Internal Revenue Code (IRC), employer health plans cannot discriminate, in either their design or operation, in favor of highly compensated or key employees.

The annual required nondiscrimination testing is a series of calculations performed on enrollment, benefit, and cost data provided by the employer group.

For the majority of employers, the testing process is typically passed without much (if any) needed action. Employers who do not perform the testing annually can be subject to fines and penalties, including the disqualification of all highly compensated employees.