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Chapter 2. The Rules: Understanding Your... > Nondiscrimination Testing - Pg. 24

The Rules: Understanding Your 401(k) 24 Remember that a 401(k) withdrawal option is discretionary. In other words, the sponsor doesn't have to make it available to you. In fact, most 401(k) plans do not offer age 59½ or in-service withdrawals. And more companies are dropping the after-tax feature. Nondiscrimination Testing Congress is always looking out for the little guy. So when 401(k)s came to be, there was a very big concern that the little guy wouldn't participate and only the big guy would enjoy the advantages. To prevent this from happening, Congress charged the IRS with creating a series of tests that plan sponsors had to meet. In simple terms, these tests were designed to prevent discrimination against non­highly compensated employees (NHCE)--hence the name "nondiscrimination testing." You may be wondering, "What does this have to do with me?" Well, if you made less than $85,000 in 2001, this stuff means nothing. Why? Because the IRS considers you to be an NHCE. But if you made $85,000 or more, then you may be considered a highly compensated employee (HCE), which means that your contributions could be limited. You see, the highly compensated employees are the people that the IRS and the Department of Labor say should not enjoy too many benefits from the 401(k). So, if your company employs a lot of NHCEs and they don't participate in the company 401(k) plan or they contribute very little, your company could fail the nondiscrimination tests. Warning!