Get on Top of Nondiscrimination Testing

It’s that time of year… No, not Halloween, but even scarier – nondiscrimination testing time! While there are different schools of thought on when to test your cafeteria plans, the bottom line is the IRS requires that your plans have passed all testing by the last day of the plan year. Many employers wait until final quarter to perform their initial testing – so if you haven’t done so already, now is the time.

Nondiscrimination testing is performed to ensure your pre-tax benefit plans don’t discriminate in favor of Highly Compensated Employees (HCEs) or Key Employees as they relate to eligibility, contributions and benefits. We’ve highlighted a number of tests that are part of nondiscrimination testing:

Section 125 Cafeteria Plan
     Eligibility Test
     Contributions and Benefits Test
     Key Employee Concentration Test

Health FSAs
     Eligibility Test
     Benefits Test

Dependent Care FSA
     Eligibility Test
     Contributions and Benefits Test
     More-Than-5% Owners Concentration Test
     55% Average Benefits Test 

If you’re outsourcing the administration of your cafeteria and FSA plans, it’s likely that your vendor performs the testing on your behalf. You may find that most plans will pass the majority of testing, but look out for the dependent care FSA results – it’s increasingly common for companies to fail the 55% Average Benefits Test, which has to do with utilization.

If that isn’t enough to make your head spin, self-insured plans and Health Reimbursement Arrangements are subject to their own forms of nondiscrimination testing under section 105(h) rules. Testing for these types of plans also require that eligibility and benefits do not discriminate in favor of what are referred to as Highly Compensated Individuals (HCIs). 

As a rule of thumb, you’ll want to make sure you test sooner than later so that you can make any necessary adjustments to accommodate for early failures before you do your final test. And it’s important to note that NO employers are excluded from performing nondiscrimination testing.

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