Cafeteria plan section 125 nondiscrimination testing. Section 105h testing under section 105h, if an employers self. The section 105h nondiscrimination rules do not apply to fully insured group health plans. Eligibility testing data section 125 fair crosssection test a.
The testing is not as extensive when only premiums are involved. It appears that these programs must satisfy the nondiscrimination tests as a condition of. Discrimination test when section 125 was designed, the government wanted to ensure that. Nondiscrimination testing for flexible spending account plans. Code section 125, along with health reimbursement arrangements hras and.
To receive this tax advantage, the cafeteria plan must generally pass the following three nondiscrimination tests. The section 125 plan is required to be in writing and notice is required to be given to your employees in the form of an summary plan description. Testing is required by section 105h of the internal. Section 125 flexible benefit plan discrimination testing. Under the 2007 proposed regulations, code section 125 nondiscrimination tests are to be performed as of the last day of the plan year, taking into account all nonexcludable employees who were employed on any day during the plan year. Nondiscrimination testing in order to retain taxfavored status, the irs code requires that section 125, 105h and 129 plans pass a series of nondiscrimination test each year. However, we still advise employers to run discrimination testing as soon as the enrollment is complete. Compliance our compliance page contains useful educational information on some of the irs regulations surrounding the premium only plan pop, flexible spending account fsa, and transportation plans. New updated nondiscrimination testing software, that is now included with your section 125 premium only plan document, takes a complicated compliance requirement and turns it into a dataentry and oneclick process in less than 35 minutes. Our nondiscrimination testing website includes the irs required tests, along with detailed instructions and definitions of many terms to assist you.
Section 125 plan nondiscrimination requirements testing. They might even be able to pass this test with a ratio that is less than 50%. Keep reading to find out what you need to know when performing this important testing. This saves both the employer and the employee money on income taxes and social security taxes.
Regardless of grandfathered status, if the selfinsured plan is offered under a cafeteria plan and allows employees to pay premiums on a pretax basis, then the plan is still subject to the section 125 nondiscrimination rules. I believe that datapath datapath and hr consulting group make such modules available in connection with their 125 plan administration software. Irs section 125 premium only plan for nonprofits no,you. Please let us know if you have any questions or if we can help you connect with someone who specializes in nondiscrimination testing for cafeteria plans. Nondiscrimination testing is required for qualified retirement plans to ensure that benefits under the plan do not discriminate in favor of officers, owners, shareholders, employees in authority of other employees or any other employee classified as a highly compensated employees hces. You will find this and other nondiscrimination testing information in your section 125 or health reimbursement arrangement plan document package. A pop plan is used when health insurance, dental insurance andor vision insurance are the only benefits that the employees will be paying for on a pretax basis.
Your core125 plan document package includes forms to assist you in. As noted above, some tests are related to eligibility and availability of benefits, and other tests are based on actual benefits elected utilization. Section 125 plans premium only and fsa plans to pass nondiscrimination. Loss of coverage under a state childrens health insurance program chip or medicaid.
Meanwhile, employers who fail to test annually risk the possibility of a host of fines and penalties. What types of section 125 nondiscrimination testing are available. If a discrimination problem is discovered prior to the end of the plan year or during the plan year, adjustments can be made in the prohibited groups hces and keys elections to allow the plan to pass the testing. At human interest, we work on nondiscrimination testing for small businesses every day. Nondiscrimination testing is required as of the last day of the plan year. Discrimination testing can be a timeconsuming difficult task but not for the cafeteria plan manager. Section 125 nondiscrimination testing sentinel benefits. These rules determine whether salary reductions under the plan are taxable. Nondiscrimination tests for cafeteria plans a section 125 plan, or a cafeteria plan, allows employers to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. No outside administrator or software is needed to implement a section 125 plan. Weve also created a nondiscrimination testing workbook to help employers complete the worksheet and to answer some frequently asked questions. Software for nondiscrimination testing cafeteria plans. Compliancebugs nondiscrimination testing and analysis services allows you to upload your plan data to test for compliance with irc section 125.
When to perform testing under the 2007 proposed regulations, code section 125 nondiscrimination tests are to be performed as of the last day of the plan year, taking into account all nonexcludable employees who were employed on any day during the plan year. For some employers, premium only plans pops are a great solution. A pop is a section 125 cafeteria plan that allows employersponsored premium payments to be paid by the. Section 125 sentinel benefits employee benefits administration. Tasc has years of employee benefits experience supported by. This article provides an overview of section 125 cafeteria plans and. With acronyms like adp, acp, nhces, and hces, the technicality of 401 k plan nondiscrimination testing may seem overwhelming. Although nonprofits dont have owners they may have highly compensated employees and are also required to perform nondiscrimination testing.
A cafeteria plan also sometimes called a section 125 plan is subject to certain nondiscrimination rules under internal revenue code irc section 125. Do i need a section 125 premium only plan document. Employees only if they are provided and utilized on a nondiscriminatory basis when compared to other employees. No one wants to spend hours learning a new software program so the program walks you through every step. Because the group of employees included in the testing can change during the year, the final results cannot be known until the end of the year. Even though nondiscrimination testing is likely performed by a plans recordkeeper or thirdparty administrator tpa, plan sponsors need to understand the basics of the tests, including the types of contributions. Are all employees eligible to participate in the plan. A resource guide for health and welfare nondiscrimination testing. Also, if the benefits are offered through a section 125 cafeteria plan, the cafeteria plan nondiscrimination rules will impact whether contributions made by highly compensated employees are taxable. Premium only plan pop safe harbor test for eligibility. Your plan allows employees to pay for their health care and dependent care expenses on a pre. The plan must be available to enough nonhighly compensated employees. We provide a bestflex plan and ebc hra nondiscrimination testing worksheet that is available online.
There are nine different tests that can be applicable to benefits provided under a section 125 plan. Selfinsured medical reimbursement plans that are offered under a cafeteria plan which is generally the case must also pass section 105h nondiscrimination testing, which determines whether reimbursements made under the plan are taxable. Section 125 nondiscrimination testing not to be confused with the delayed aca nondiscrimination rules applies even if the plan is insured. Cafeteria plan nondiscrimination testing cafeteria plan testing.
Section 105h nondiscrimination testing applies in both cases. How to identify key employees and hces to conduct non. This page is intended to assist you in determining if you are eligible to implement these benefits based on your employers demographic. Testing is performed instantaneously after data submission. If you sponsor a cafeteriasection 125 plan, there are three tests to complete. By answering a few, easytounderstand questions, the program will perform the tests and provide documentation that your cafeteria plan passed with flying colors. The plans eligibility requirements must include a sufficient number of nonhighly compensated employees. While each includes numerous tips, examples, and procedural recommendations, the way each is used is different.
For nondiscrimination testing purposes, all employees, including any. Compliance testing section 125 pop and fsa nondiscrimination testing. Note that a plan does not cease to be qualified for all participants just because it is discriminatory. Easytouse software the cafeteria plan manager is a windows based program allowing the user to perform tasks with the click of a mouse. The article below is a great place to start when figuring out the basics of cafeteria plan section 125 nondiscrimination testing. If you have a flexible spending account fsa or a premium only plan pop, the irs requires you to submit to nondiscrimination testing once a year. Under the 2007 proposed regulations, code section 125 nondiscrimination tests are to be performed as of the last day of the plan year, taking into account all non. These plans are for employers who do not want to offer a full flexible spending account fsa plan, but still want to offer a tax benefit for their eligible employees. An overview of section 125 pop plan nondiscrimination testing august 28th, 2010 0 comments posted by admin both employers and employees stand to gain a lot if a section 125 pop plan is established and administered within an organization. Nondiscrimination testing employee benefits corporation. Fully insured health plans are exempt from section 125 nondiscrimination testing. It is the easiest type of section 125 plan to maintain and it involves little or no annual discrimination testing. Generally, those rules prohibit a cafeteria plan from discriminating in favor of highly compensated individuals hcis as to plan eligibility and benefits. Nondiscrimination testing each year, employers are obliged to ensure that their flexible spending accounts fsas, health reimbursement arrangements hras, group term life insurance, and selfinsured medical plans do not discriminate in favor of highly compensated individuals hci.
Regardless of grandfathered status, if the selfinsured plan is offered under a cafeteria plan and allows employees to pay premiums on a pretax basis, then the plan is still subject to the section 125. By christine roberts, september 2, 2010 in health plans including aca, cobra, hipaa. Further, section 125 nondiscrimination rules apply to all cafeteria plans regardless of their status as fully insured, selffunded, church plan, or governmental plan. However, corrections for section 125 plans cannot be. Employers that satisfy the 50% ratio are considered to have met the pop plan safe harbor test for eligibility. If a plan fails any of these nondiscrimination tests, the highly. Nondiscrimination testing to ensure there is not discrimination in favor of highly compensated individuals, section 125 requires cafeteria plans to pass three tests an eligibility test, a contributions and benefits test, and a key employee concentration test.
Section 125 of the irs code states that all tax advantaged employee benefits plans need to be nondiscriminatory. The plans must not discriminate in favor of highly compensated employees hces andor. You have access to reports showing your results which you can also print for your records. Section 125 nondiscrimination testing what is section 125 nondiscrimination testing. If the ratio is less than 50%, the employer doesnt necessarily fail the nondiscrimination testing. A premium only plan pop is the simplest type of section 125 plan. Each year, employers are obliged to ensure that their flexible spending accounts fsas, health reimbursement arrangements hras, group term life insurance, and selfinsured medical plans do not discriminate in favor of highly compensated individuals hci. The goal of this testing is to ensure that those key andor highly compensated employees identified by the employer, are not participating in the section 125 plan at a disproportionate rate. Section 125 premium only plan nondiscrimination testing. The guidance allows these plans to skip the concentration and benefits test and 25% concentration test if they pass the safe harbor eligibility test. Section 125 sets forth the nondiscrimination rules that apply to cafeteria plans. When is nondiscrimination testing on a cafeteria plan. Thats why youre required to perform nondiscrimination testing for any plans.
Our testing is very comprehensive in order to ensure compliance with federal regulations. Section 105h nondiscrimination rules the horton group. Cafeteria plan testing 25% key employee concentration test ensures of all the pretax dollars being spent through the cafeteria plan, no more than 25% is being spent by key employees eligibility test ensures enough nonhighly compensated employees are eligible to participate in the cafeteria plan fsa. Be aware that section 125 nondiscrimination rules are separate from and unrelated to section 105h nondiscrimination rules. We monitor all of our clients accounts to notify them when theyre at risk of failing, and help set up plans that keep them from failing in the first place all included. In order to qualify for taxfavored status, a section 125 plan must not discriminate in favor of highly compensated employees hces and key employees with respect to eligibility, contributions, and benefits. Is anyone aware of any type of software available to perform nondiscrimination testing in a cafeteria plan. Nondiscrimination testing section 125 employer help center. Chapter 10 coverage and nondiscrimination page 106 coverage and nondiscrimination the ratio percentage test introduction the ratio percentage test is satisfied if the plans ratio percentage is greater than or equal to 70%. A onepage summary of all plan sponsor responsibilities is included in your package.
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