IRS regulations permit a number of common safe harbor definitions including, for example, W-2 pay plus elective deferrals. A nonconforming pay definition may force a plan into using the general test to demonstrate nondiscrimination, even if other plan aspects conform to safe harbor standards. In lieu of meeting the safe harbor requirements, a plan can demonstrate nondiscrimination by passing the general test. Considerable regulation is devoted to the general test, most of which is beyond the scope of this paper. For every highly compensated employee, a group is created which consists of all the highly compensated and non-highly compensated employees who have larger accrual rates than the highly compensated employee who defines the group.
Accrual rates are the main component of the general test.
Accrual rate is the benefit an employee has earned to date, divided by the service earned to date, divided by average testing compensation. Note that an accrual rate results from a plan's benefit structure, and the general test is not a template for allowable benefit formulae. A key component to the operation of the general test is imputing permitted disparity. The accrual rates determined as part of the test can be increased, within limits, by permitted disparity. The increase in the accrual rates will be relatively larger for non-highly compensated employees, and this will allow a plan to pass the general test more easily.