Employers offering employee benefit plans can not discriminate in favor of highly compensated employees (HCEs) or key employees with respect to eligibility, contributions or benefits. Non-discrimination tests ensure employers are in compliance with all regulations in order to maintain their tax-favored status.
The IRS requires employers with Flexible Spending Account (FSA) plans and Premium Only Plans (POP) to submit non-discrimination tests annually.
Section 125 Cafeteria Plan - POP Test
- Eligibility Test
- Contributions and Benefits Test
- Key Employee Concentration Test (utilization)
Flexible Spending Accounts (FSA) Test
- Eligibility Test
- Benefits Test
Dependent Care Assistance Plan (DCAP) - The Dependent Care Plan test is required if the DCAP benefit is offered within the Flexible Spending Account.
- Eligibility Test
- Contributions and Benefits Test
- More-Than-5% Owners Concentration Test
- 55% Average Benefits Test
All nine tests must be satisfied to be in compliance. The Eligibility Test can be satisfied with proper plan design.
Key Employee 25% Concentration Test - applies to all pretax benefits provided under the plan. No more than 25% of the aggregate of all non-taxable benefits may be provided to key employees.
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.
5% Owners Test - 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).
