Nondiscrimination Testing

Flex-Plan Services provides annual nondiscrimination testing. The Section 125 Plan includes the Premium Conversion Plan (enables employees to pay accident and health plan premiums pretax) and the Health and Day Care FSA. The annual test is conducted at the end of each year. All plans are required to complete end of the year testing to determine whether a plan discriminates in favor of Highly Compensated Employees or Key Employees. No Plan is exempt from testing.

Flex-Plan also provides nondiscrimination pretesting at the beginning or middle of the year for plans that anticipate problems passing the tests. The pretest allows employers to make mid-year adjustments to benefits to avoid failing end of the year tests. You are responsible for notifying us if you see any potential problems based on the below information. We can only test what we are made aware of.

NONDISCRIMINATION TESTING – BRIEF EXPLANATION

There are 5 distinct aspects of nondiscrimination testing. The Eligibility Test, Contributions & Benefits Test, Key Employee Concentration Test, the 55% Day Care Average Benefits Test, and the 5% Owner Test.

ELIGIBILITY TEST
This test looks at who is asked to participate in the Section 125 plan. You must have at least some non-Highly Compensated Employees eligible to participate in the plan.

CONTRIBUTIONS & BENEFITS TEST
This test has several subtests. All employees should receive the same amount of employer contributions, the eligibility rules should be the same for all employees, and the same benefits must be provided to all employees.

THE KEY EMPLOYEE CONCENTRATION TEST
This test compares the nontaxable benefits provided to Key Employees to the nontaxable benefit provided to all employees. Nontaxable benefits include the value of the group medical premium, contributions to a Flexible Spending Arrangement, contributions to an HRA or HSA, and contributions to any other benefit provided under the Section 125 Plan. The value of nontaxable benefits provided to Key Employees cannot exceed 25% of the total nontaxable benefits provided under the plan.

55% AVERAGE BENEFITS TEST
This test looks at the average Day care benefits provided to Highly Compensated Employees as compared to the average Day care benefits provided to non-Highly Compensated Employees. Know who is participating in your Day Care FSA—plans fail this test most often. If you have HCEs in the Day Care FSA, non-Highly Compensated Employees must receive 55% or more of the benefits under the plan. PLEASE SEE “RED FLAGS” BELOW.

5% OWNER TEST
More than 5% Owners cannot elect more than 25% of the total amount elected under the Day Care FSA.

NONDISCRIMINATION TEST RED FLAGS

If your plan contains any of the following situations or plan designs please contact Flex-Plan Services as soon as possible to have your plan reviewed and tested.

• Zero non-HCEs eligible for Premium Conversion Plan or the Health & Day Care FSA;
• The plan excludes a high percentage of employees (part-time, seasonal, hourly employees) or non-HCEs;
• Not all employees receive the same employer contributions;
• KEYs or HCEs receive more employer contributions toward their group medical premium or the FSA than other employees;
• Disparate waiting periods or disparate eligibility requirements (e.g. hourly receive benefits after 90 days, salary after 30);
• Different benefits provided to employees;
• Only 5% Owners participating in the Day Care FSA;
• A high percentage (>25%) of KEYS contributing to the Flexible Spending Arrangement;
• Only HCEs participating in the Day Care FSA; or
• Only one participant in the Day Care FSA and that participant is an HCE.

Plans frequently fail the Day Care Test.  The plan cannot have only HCEs participating in this portion of the plan or it will fail.

DEFINITIONS

Highly Compensated Employee (HCE)

Whether an individual is a Highly Compensated Employee depends on their status during the prior plan year (or the current year in the case of the first year of employment).

• An Officer; or
• An owner owning more than 5% of the Employer, voting power, or value of all classes of stock; or
• An Employee who earned in excess of $105,000 in the 2008 plan year (for 2009 tests) or $110,000 in the 2009 plan year (for 2010 tests).
• A spouse or dependent of an individual described above that works for the same Employer.

Key Employee (KEY)

Whether an individual is a Key employee depends on their status during the prior plan year.

• An Officer earning more than $150,000 in the 2008 plan year (for 2009 tests) or $160,000 in the 2009 plan year (for 2010 tests); or
• A more than a 5% owner; or
• A more than a 1% owner receiving compensation in excess of $150,000 in the prior plan year.
• Note Government Entities do not have Key Employees.

INELIGIBLE INDIVIDUALS

More than 2% owners of an S-Corp (and their spouse, children, grandchildren, and parents), partners in a partnership, or members of an LLC are not eligible to participate in a Section 125 plan—this includes the premium only plan as well as the Health or Day Care Flexible Spending.  In the event these individuals are participating in the plan please promptly remove them and do not consider them for any of the test questions.

OFFICERS