When is Nondiscrimination Testing on a Cafeteria Plan Required?

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As open enrollment season gets into full swing and calendar year plans are approaching 4th quarter, we thought it would be helpful to provide answers to some of the more frequently asked questions regarding the required annual nondiscrimination testing.

What is the purpose of the nondiscrimination testing?

The IRS requires that any organization that offers a cafeteria plan (or in other words, a pre-tax benefit plan) must perform various tests on the plan annually at the end of each plan year to determine if the plan is nondiscriminatory. In other words the plan cannot favor highly compensated employees.

How many tests are required if the cafeteria plan includes premiums and flexible spending accounts?

The number of tests required is determined by plan type and which benefit offerings are included in plan as follows:

2 tests per self-funded health plan (e.g. Health Care FSA)

  • Eligibility Test
  • Benefits Test

4 tests per Dependent Care FSA

  • Eligibility Test
  • Contributions and Benefits Test
  • 55% Average Test
  • 25% Owner Concentration test

3 tests per Cafeteria Plan

  • Eligibility Test
  • Contributions and Benefits Test
  • 25% Concentration Test (Key employee test)

 

I am an employer will less than 100 employees, do I have to do this?

Yes. All employers that sponsor a cafeteria plan, regardless of the number of employees or participants are required to test their cafeteria plan.

I am a governmental entity (i.e. public school district) or church plan that is not subject to ERISA. I don’t need to file a Form 5500. Do I need to do this?

Yes. All employers that sponsor a cafeteria plan are required to test their cafeteria plan annually. There is no exception for governmental entities and church plan.

We only sponsor a Premium Only plan. Is nondiscrimination testing required?

Yes. The Premium Only plan is a cafeteria plan subject to annual nondiscrimination testing. The testing is not as extensive when only premiums are involved.  The guidance allows these plans to skip the Concentration and Benefits Test and 25% Concentration Test if they pass the Safe harbor Eligibility Test.

When is the testing due?

Nondiscrimination testing is required as of the last day of the plan year. Many employers test prior to the end of the plan year to allow the employer time to make changes to the elections before the end of the plan year. No changes to elections are permitted after the plan year is complete, which may result in imputed income for the highly compensated and/or Key Employees affected by any testing failures.

What happens if an employer does not do the required annual nondiscrimination testing?

If the IRS audits the plan, they will likely request copies of testing results or even the actual test to determine that you have performed and passed the nondiscrimination tests for each year they are auditing. Failure to provide testing results may result in plan disqualification which could lead to tax penalties for the employer and participants.

Who performs the nondiscrimination testing on the cafeteria plan? Testing would be the employers’ responsibility unless the employer has contracted with a third party to perform the required tests.

Note: Employee Benefits Corporation provides nondiscrimination testing service for employers with our BESTflex or BESTflex Premium Only plans, and for those that have contracted for stand-alone testing under Compliance Services. Annually the employers provide details regarding owners, officers, highly compensated individuals, family members related to owners, officers and highly compensated individuals and a complete listing of non-highly compensated employees that is used to perform the required annual nondiscrimination testing. Upon receipt of the requested data, we are able to perform the necessary tests and notify the employer of the results. In the event of a failure, we identify which individuals are impacted by the failure and the employer will work with their payroll provider or tax advisor to make any changes to the plan or report any required imputed income.

Want to learn more about Nondiscrimination Testing?

Check out our webinars on this topic located on the Webinar page on our website.

 

 

Categories: Benefits in General, Compliance | Tags: IRS , Nondiscrimination Testing , Key Employees , Highly Compensated Employees , Non-Highly Compensated Employees , FSA , Premium , Cafeteria Plan | Return