Non-Discrimination Rule – Definition

Cite this article as:"Non-Discrimination Rule – Definition," in The Business Professor, updated September 24, 2019, last accessed October 24, 2020,


Nondiscrimination Rule Definition

A nondiscrimination rule refers to a provision in qualified retirement plans that prohibits a company or an employer from treating employees unequally. The nondiscrimination rule is a rule that maintains that all employees in a company should be given the same benefits regardless of their status or position in the company. In the United States, the Internal Revenue Service enforce the nondiscrimination rule. This rule prohibits certain employees from being highly-compensated at the disadvantage of other employees of a company because of their status in the company. According to the nondiscrimination rule, all employees of a company must be treated equally and be eligible for the same benefits. There are diverse retirement plans for employees such as 401(k) plans. It is possible for the terms of these plans to be adjusted given various reasons.

A Little More on What is a Nondiscrimination Rule

The Employee Retirement Income Security Act (ERISA) requires that all employees be qualified for the same benefits, hence employers must adopt the nondiscrimination rule. The nondiscrimination rule maintains that despite adjustments made to employee’s retirement plans, nondiscrimination rules must be kept. Non discrimination rules are conatined in Section 105 (h) of the Internal Revenue Code, this is a clause that prevents discrimination of certain employees or highly compensation specific employees at the disadvanatge of the others. ERISA stipulates certain guidelines for the execution of nondiscrimination rules. A nondiscriminatory rule does not prohibit a company from having other discriminatory or non-qualified retirement plans in addition to the standard retirement plans.

ERISA History

The Employee Retirement Income Security Act (ERISA) was established to safeguard the equal rights of employees under retirement plans. ERISA was established in 1974 and after its establishment, certain laws were put in place to eliminate discrimination of employees. The nondiscrimination rule was one of the rules that states that all employees must be treated equally and no set of employees should be highly-compensated over others. The assets or funds in the retirement plan must be managed in the best interest of the participants.

Aside from ensuring equal treatment of employees, ERISA is in charge of retirement funds to abate misappropriation of such funds.

There are investments options available for plan, the Prudent Investor Rule states those options. The investment decisions that are allowed on employee retirement plans are recommended in the investment policy Statement which companies are expected to abide with.

For employees who leave a company, there are certain provisions through which they enjoy the retirement plan. One of these is the vesting period, employees who have spent the required amount of time with a company can earn a right to the retirement benefit through vesting options.

It is important to know that the rules, guidelines and regulations of ERISA are not binding for all companies. Government-owned firms or companies are not subject to ERISA, which means their retirement plans do not have to follow the patterns given by ERISA.

Simplified Employee Pension plans are also not subject to ERISA regulations. These plans are forms of IRA that employers, especially small businesses set up as a form of contribution to an already established employee retirement savings.

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