Key points

• Nondiscrimination Testing IRS Requirements

• What is included in our testing services

• Common worksheet errors• Testing failure reasons• Outside factors that impact

testing results

Nondiscrimination Testing IRS Requirements• Mandated testing for each

plan year• BESTflex plans have 9

required tests• Test and results may be

requested at audit

• Fees associated with failure to test

• Failure of a test results in taxation penalties

What is included in our testing services• All 9 tests• Worksheet and workbook

materials• Phone or e-mail assistance• Education on how to correct

failures• Testing result notification• Record-keeping of results

and tests• Guidance to prevent

failures

What is included in our testing servicesFor each type of benefit, various

testing is performed

• Health Care FSA (Section 105)– Eligibility Test *– Benefits Test

• Dependent Care FSA (Section 129)– Eligibility Test– Contributions and Benefits Test– 55% Average Test *– 25% Owner Concentration Test

• Cafeteria Plan (Section 125)– Eligibility Test– Contributions and Benefits Test *– 25% Concentration Test (key employee test) *

* Most common tests that fail

Common worksheet errors• Many fail letters sent due

to inaccurate data– Cafeteria Plan components

incorrect– Officer listed as incorrect

individual– Compensation listed as W-2

wages– Compensation reports wrong

period– Employees inactive during plan year

listed– Eligibility listed incorrectly– Employee list limited

Common worksheet errors• Cafeteria Plan components

incorrect– Appears self-employed individual

is participating– Utilization of highly-compensated

appears larger or smaller than actual

• Officer– Number of officers appears larger– Safe Harbor tests pass in error

Common worksheet errors• Compensation reports W-2

wages– Employee classified as non-highly

compensated in error– Inability to list employees from

highest-paid to lowest-paid• Compensation reports

wrong period– Employee classified as highly

compensated in error

Common worksheet errors• Employees not active

during plan year listed– Overall employee count increases– Total compensation increases– Utilization of plan appears lower

• Eligibility listed incorrectly– Tests completed or skipped in

error– Total compensation reported

inaccurately– Ratios appear more or less

balanced

Common worksheet errors• Employee list limited

– Only eligible employees listed• Eligibility testing results not accurate• Employees identified as non-highly compensated

in error• Utilization percentages inaccurate

– Terminated employees not listed• Eligibility testing results not accurate• Employees identified as non-highly compensated

in error– Related Employer employees not listed

• Eligibility testing results not accurate• Employees identified as non-highly compensated

in error• Utilization percentages inaccurate

Testing failure reasons• Health Care FSA (Section 105)

– Eligibility Test *• Reasons

– Health Care FSA participation top-heavy– Includes top 25% by pay regardless of

compensation or authority as “highly compensated”

• Options to avoid failure– Increase participation among lower-paid– Decrease participation among higher-paid– Limit eligibility to only full-time employees– Offer an employer contribution for all eligible

employees into a Health Care FSA

*Most common tests that fail

Testing failure reasons• Health Care FSA (Section 105)

– Benefits Test• Reasons

– Waiting period discrepancies– Different maximum for groups of employees

• Options to avoid failure– Same waiting period for all eligible– Same maximum election for all eligible

Testing failure reasons

• Dependent Care FSA (Section 129)– Eligibility Test

• Reasons– Too many ineligible employees

• Options to avoid failure– Hire less seasonal or part-time employees– Expand eligibility

– Contributions and Benefits Test• Reasons

– Offering onsite daycare to some employees only

– Different maximums for groups of employees• Options to avoid failure

– Offer same benefits to all eligible employees

Testing failure reasons• Dependent Care FSA (Section

129)– 55% Average Test *

• Reasons– Very small percentage of employees are

owners or highly compensated individuals and one of them participates

– Not many non-highly compensated individuals elect Dependent Care FSA

• Options to avoid failure– Owners and highly compensated individuals

do not participate

– Owners’ and highly compensated individuals’ maximums are reduced based on preliminary test findings

» Constant monitoring in case of election changes

» Constant monitoring in case of new hires» Can only modify by reducing election during

plan year

*Most common tests that fail

Testing failure reasons• Dependent Care FSA (Section

129)– 25% Owner Concentration Test

• Reasons– More than 5% owners participate in

Dependent Care FSA

– Not many employees elect Dependent Care FSA

• Options to avoid failure– More than 5% owners do not participate– More than 5% owners’ combined maximum is

limited to 33% of all other employees’ total Dependent Care FSA dollars elected

» Constant monitoring in case of election changes

» Can only modify by reducing election during plan year

Testing failure reasons• Cafeteria Plan (Section 125)

– Eligibility Test• Reasons

– Too many ineligible employees• Options to avoid failure

– Hire less seasonal or part-time employees– Expand eligibility

Testing failure reasons• Cafeteria Plan (Section 125)

– Contributions and Benefits Test *• Safe Harbor pass if company pays 75% or more

of every health plan premium for every eligible employee

• Reasons for failure– Owner, officer, and highly compensated individuals

comprising large percentage of the pre-tax insurance premiums

– Owner and/or officer participates in pre-tax insurance premiums and the disparity in compensation is not great

• Options to avoid failure– Increase participation in pre-tax insurance

premiums– Avoid 100% employer-paid single insurance plans– Increase owner and/or officer compensation– Owner and/or officer pay share of insurance premiums

post-tax– Decrease eligibility of employees

*Most common tests that fail

Testing failure reasons• Cafeteria Plan (Section 125)

– 25% Concentration Test (key employee test)*• Reasons for failure

– Key Employees participate to a more than 25% extent in total Cafeteria Plan benefit plans

– Not many employees have pre-tax insurance or FSA elections

• Options to avoid failure– Key Employees pay portion of insurance

premiums post-tax– Avoid 100% employer-paid single insurance

plans

*Most common tests that fail

Outside factors that impact testing results• Large changes in number of

employees• Implementing a HDHP• Changing plan year• Employees’ children aging

out of Dependent Care• Economy

Outside factors that impact testing results• Large changes in number of

employees– Mass layoffs

• Lowers participation among non-highly compensated employees

• Section 105 Eligibility Test at risk– Mass hiring

• New employees are ineligible: Section 129 and 125 Eligibility Tests at risk

• New employees are eligible and do not elect Health Care FSA: Section 105 Eligibility Test at risk

Outside factors that impact testing results• Implementing a HDHP

– Section 105 Eligibility Test risks• Higher interest among lower-paid

individuals• Alleviates most interest in Health

Care FSA due to HSA interaction• Limited Health Care FSA not as

appealing– Section 125 Contributions &

Benefits Test risks• Pre-tax HSA contribution inequality• Maximum allowable restricted based

on family structure

Outside factors that impact testing results• Changing plan year

– Involves running a short plan year• May decrease interest for non-highly

compensated• Highly compensated may continue to

elect causing failures• Employees’ children aging

out of Dependent Care– Highly compensated individual

continues to elect– Non-highly compensated individuals

drop

Outside factors that impact testing results• Economy

– Employees feel need to save– Employee becomes ineligible for

Dependent Care elections due to spouse not employed

– Employees’ spouses’ employer implements HDHP

– Premium rate increases• Greater percentage of compensation

in Section 125 Contributions & Benefits Test

• Employees change from family to single coverage

Summary of key points• Annual plan testing required• Testing services included in annual

renewal fee• Accurate and complete worksheet needed

for accurate results• Complexity of tests and various

definitions of highly compensated make pass/fail predictions difficult

• Even preliminary testing is not a guarantee

• Main ways to avoid failure– Reasonable eligibility standards– Higher Health Care FSA participation (employer

contribution)– No Highly Compensated Individual participation

in Dependent Care FSA– Have all employees pay a portion of premiums

pre-tax• Unavoidable outside factors can

cause failure

Questions?

• Any questions can be addressed by e-mail or phone at your convenience

Compliance Department608 831 8445800 346 2126compliance@ebcflex.com

http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx

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