What To Know About Nondiscrimination Testing

February 16, 2023

Why Perform Non-discrimination Testing?

If you have a Flexible Spending Account (FSA) or a Premium Only Plan (POP), the IRS requires you to submit to non-discrimination testing once a year. This is to ensure that a company's Medical or Dependent Care FSA treat all employees equally, and do not favor key or highly-compensated employees (HCEs)

Three Most Common Reasons Non-discrimination Tests Fail

• Dependent Care FSA - 55% Average Benefits Test (utilization)
  • Because HCEs typically participate in the DCAP at a much higher rate than non-HCEs, it is not unusual for a plan to fail the 55 percent average benefits test. To reduce the likelihood of failure, an employer may consider capping HCE DCAP elections at an amount below the $5,000 maximum.
• Dependent Care FSA - Eligibility Test
  • DCAPs that exclude certain categories of employees from participation (e.g., part-time, hourly) or that are only available to employees of one member of a controlled group may fail the eligibility test.
• Need another

Most Frequently Asked Questions When Completing  a NDT Template Used to Perform Testing

• What Premiums do I enter.
  • Enter the annual employee portion of all premiums (e.g., group medical, dental, etc.) taken on a pre-tax basis.
• Does NDT include HSA Contributions.
  • Yes. Enter both the Employer contributions and the Employee pre-tax expected annual HSA contributions.
• Current Year Annual Compensation.
  • Enter the annual compensation for the current plan year that is being tested.
    (i.e., if testing the 2021 plan year, enter projected compensation for 2021.) For new hires, enter projected current-year compensation.
• Employer Contributions And Employee Pretax Payroll Deductions
  • This column combines employer contributions and employee elections. Enter the total of all employer contributions on behalf of the employee combined with the employee pretax deductions for the entire plan year. This will include all employer contributions to the employee's HFSA, DCAP, HSA, and premiums (group medical, dental, vision).
• Ownership % of Company.
  • Code 318 Attribution rules apply; If an Employee is related to an owner, as spouse, parent, child or grandchild, that person's ownership percentage could be required to be entered for that employee as part of the test.