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Nondiscrimination rules

Requirements for tax-qualified retirement plans, such as 401(k) plans, that limit participation by executives and other highly paid employees if their participation would otherwise result in contributing too much relative to contributions by lower-paid employees. These rules limit the extent to which elective contributions of highly compensated employees can exceed those of lower-paid employees, and are among the reasons your company might set up a nonqualified deferred compensation plan. This determination requires what is known as average deferral percentage (ADP) testing and other types of tests (see a brief summary from the law firm Schneider Downs).