If your company offers any form of a pre-tax welfare benefits plan such as group Medical, Dental, Vision or Life insurance (commonly referred to as a Premium Only Plan or POP), or a Flexible Spending Account (commonly referred to as an FSA or Cafeteria Plan), there is an IRS requirement to test your benefit plan for Nondiscrimination Testing on an annual basis. These tests are designed to make sure that the company is treating all of its employees relatively in regards to their benefits package and not giving employees who are higher paid or in management positions better benefits than their lower-paid or non-management employees.
While it is easy to overlook, nondiscrimination testing is an essential piece of a company’s compliance requirements. If an employer does not perform this annual testing or does not adequately follow the steps necessary for this testing, it could lead to some hefty consequences, including losing their ability to offer pre-tax welfare benefits to their employees. HR Service, Inc. helps relieve that stress by performing this annual test in a timely and affordable manner. No matter what type of benefits your company offers, HR Service, Inc. can ensure that your company is following the IRS testing requirements.
Types of Testing
Depending on what type of benefits your company offers, there are up to nine different tests that may need to be administered. Some tests are related to eligibility and availability of benefits, and some are based on how many employees have elected these benefits. We have included a list of tests that are required for each of the most common benefit packages companies offer: 105(h) Nondiscrimination Testing.
Benefits under an employer-sponsored health plan generally are not taxable due to a special section of the Code, which excludes the value of those benefits from taxation. However, to ensure that employers do not improperly discriminate in favor of Highly Compensated Individuals (“HCIs”), Congress created nondiscrimination rules under Code Section 105(h). Currently, Code Section 105(h) only applies to self-funded health plans. A plan is generally treated as self-funded, even if the plan has stop-loss insurance. Also, the Affordable Care Act (“ACA”) provides that non-grandfathered, fully insured health plans will also be subject to rules “similar” to Code Section 105(h).
The 105(h) Test is designed to verify two things. First, that “enough” non-HCIs “benefit” under the health plan, in comparison to the number of HCIs who “benefit.” Second, to verify that the health plan’s benefits (e.g., deductible levels and covered benefits) do not favor HCIs.
The Key Employee 25% Concentration Test applies to all pretax benefits provide under the plan.
No more than 25% of the aggregate of all non-taxable benefits may be provided to key employees. This would include anything paid pretax (by an employee) or provided on a nontaxable basis (by
the employer), including:
- Group health, term life or disability coverage premiums
- Health and Dependent Care FSA
- Contributions to an HSA
The Dependent Care 55% Average Benefits Test applies only to the Dependent Care FSA.
This test is passed if the average benefit provided to employees who are non-HCEs is at least 55% of
the average benefit provided to HCEs.
The 5% owners test also applies only to Dependent Care FSA. Not more than 25% of the amounts for dependent care assistance during the year may be provided for shareholders or owners (or their
spouses or dependents) who own more than 5% of the stock, the capital, or profits interest in the employer (on any day of the year).
Section 125 Premium only Plan (POP) Including HSAs
Contributions and Benefits Test
Key Employee Concentration Test
Health FSAs and Dependent Care FSA (DCAP)
All tests under POP listed above Benefits Test (FSA only) Contribution and Benefits Test (DCAP only)
More – Than – 5% Owners Test (DCAP only)
55% Average Benefits Test (DCAP only)
Section 105(H) Self Insured Medical Plans and HRAs Eligibility Tests