Nondiscrimination testing rules were created by the IRS and are generally designed to prevent plans (employers) from discriminating in favor of individuals who are either highly compensated or otherwise key to the business. Testing shows whether or not an employer's tax-advantaged plan is discriminating in favor of highly compensated employees or key employees.
so yes you can contribute $3,500 but your employer is also subject to nondiscrimination testing. if it passes then you have no tax issue. If it does not pass, then the excess benefits provided to highly compensated individuals and key employees may not be excluded from income. In this case, excess deferrals would be reimbursed, so the employee's taxable compensation is increased.
For HFSA testing purposes, a highly compensated individual is (a) one of the five highest-paid officers; (b) a more than 10% shareholder of the company; or (c) among the highest paid 25% of all employees (other than non-participant excludable employees).
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