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Does your plan make the grade?
The Internal Revenue Service (IRS) requires that cafeteria plans pass a series of discrimination tests each year.
These tests are designed to show that eligibility and plan benefits are applied fairly and consistently, which
in turn allows the plan sponsor to avoid unfavorable tax consequences.
A variety of discrimination tests can be performed to show plan compliance. Tests generally fall under two categories:
1) eligibility tests and 2) utilization tests.
(The following are brief summaries only. They are not all-inclusive and cannot address your plan specifics.)
Utilization Tests
Utilization tests (sometimes called concentration and benefits tests) show that comparable benefits are utilized
by a fair number of employees at all compensation levels and in all positions.
FlexAmerica performs the Key Employee Concentration Test, the Dependent Care Test, and the Owner's Test for cafeteria
plans with flexible spending account options.
1. Key Employee Concentration Test:
This test demonstrates that no more than 25% of non-taxable benefits are provided to key employees. Key employees
are defined as:
A. An owner of at least 5% of the company
B. An owner of at least 1% of the company with gross annual compensation
over $150,000
C. An officer with gross annual compensation over $130,000
2. Dependent Care Test: This test demonstrates that the average benefits received by non-highly compensated
employees are at least 55% of the average benefits received by highly compensated employees. A highly compensated
employee is defined as:
A. An owner of at least 5% of the company in the plan year being tested
or in the 12 months prior the plan year being tested
B. An employee with gross annual compensation before deductions over
$90,000 in the 12 months prior to the year being tested (if the employee is hired in the current year and earns
over 90K in the current year they are not considered highly compensated, unless they are an owner)
3. Owner's Test: This test demonstrates that no more than 25% of the non-taxable dependent care
flexible spending account benefits are provided to owners of at least 5% of the company
Testing services are included for all FlexAmerica administered plans.
Eligibility Tests
The IRS requires that plan eligibility be fair, consistent, and reasonable. Eligibility tests show that eligibility
is not limited to or weighted in favor of key or highly compensated employees. Thus, self-funded plans (such as
a cafeteria plan) may not exclude non-highly compensated employees from participating in favor of highly compensated
or key employees. IRS regulations do, however, permit the exclusion of certain groups of employees, including:
A. Employees with less than three years of service
B. Employees under age 25
C. Part-time or seasonal employees
D. Non-resident aliens
E Collective bargaining employees
Generally, to satisfy eligibility requirements, a plan must benefit:
A. 70% or more of all non-excludable employees, regardless of whether
they are highly or non-highly compensated; and
B. 80% or more of these employees who are eligible to benefit; and
C. Employees qualifying under a classification that does not discriminate
in favor of highly compensated employees.
What Does the IRS Require?
The IRS in conjunction with the Department of Labor requires that plan
sponsors file Form 5500 annually based on plan type and number of participants. Filings are due seven months after
the plan year ends. Some plan sponsors must also attach Schedule F (Fringe Benefit Plan Annual Information Return)
or Schedule A (Insurance Information).
Compliance & Filing Requirements
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5500
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Discrimination Testing
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Schedule F
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Schedule A
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| Premium Only Plan < 100 participants |
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x
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|
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| Premium Only Plan > 100 participants |
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x
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|
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| Flexible Spending Account < 100 participants |
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x
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| Flexible Spending Account > 100 participants |
x
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x
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x
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| Group Health, Dental, Direct Reimbursement Dental or other welfare plans
with >100 Participants |
x
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x
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All 5500's are due seven months after the plan year ends. It is important that FlexAmerica receive the requested information in a timely manner to avoid penalties for adjustments
in W2s may have to be made.
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Contact Us: info@flexamerica.com
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