Premium Only Plans and Section 125 Non-Discrimination Testing

      Information Courtesy of William "Bill" Russell, CHC, HIA    

 

 

As a business owner and plan sponsor, why do you need Non-Discrimination Testing?

 

If you have a Flexible Spending Account (FSA) or a Premium Only Plan (POP), the IRS requires you to have a written plan document and submit to non-discrimination testing once a year. 

 

The reason for non-discrimination testing is to prevent Key and highly compensated employees from taking advantage of the benefits that these plans provide for employers and employees alike.

Such advantages consist of an increase in take home pay because the dollars spent are pre-tax and a 7.65% savings annually on employers matching FICA tax.

 

Non-discrimination testing is a big factor in way of compliance.

If employers do not adequately follow all the steps necessary for non-discrimination testing, or they fall out of compliance with federally mandated regulations while using these plans, all discriminatory benefits are included in the gross pay of highly compensated employees.

 

This also means that employers can no longer take advantage of the 7.65% tax break on their annual employer matching FICA tax.

 

What are the Specific Tests to Conduct?

There are nine different tests that can be applicable to benefits provided under a Section 125 plan.

Some tests are related to eligibility and availability of benefits, and other tests are based on actual benefits elected (utilization).

 

The Section 125 Cafeteria Plan including Premium Only Plans

1.  Eligibility Test

2.  Contributions and Benefits Test

3.  Key Employee Concentration Test (utilization)

 

Health Flexible Spending Accounts

4.  Eligibility Test

5.  Benefits Test

 

Dependent Care FSA (DCAP)

6.  Eligibility Test

7.  Contributions and Benefits Test

8.  More-Than-5% Owners Concentration Test (utilization)

9.  55% Average Benefits Test (utilization)

 

If your business needs help with a written Premium Only Plan document or annual discrimination testing, please do not hesitate to contact Bill Russell for assitance.

Phone: (503) 420-9567 

E-mail: wrussell@tcibenefits.com