Guidelines for Discrimination Testing
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. There is a variety of discrimination tests that can be performed to show plan compliance. These tests generally fall under two catergories: 1) eligibility and 2) utilization. Below are some brief samples - they are not plan specific.
Utilization Tests
Utilization Tests show that comparable benefits are utilized by a fair number of employees at all compensation levels and in all positions. Polestar Benefits performs the following tests for cafeteria plans with Flexible Spending Account options:
Plans that favor highly compensated employees. If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement does not favor highly compensated employees.
A highly compensated employee for this purpose is any of the following employees.
1. An Officer
2. A shareholder who owns than 5% of the voting power or value of all classes of the employer's stock.
3. An employee who is highly compensated based on the facts and circumstances.
4. A spouse or dependent of a person described in (1), (2), or (3).
1) Key Employee Concentration Test: Demonstrates that no more than 25% of non-taxable benefits are provided to key employees. Key employees are defined as:
a) An officer having annual pay of more than $165,000
b) An employee who for 2012 is either of the following
1) 5% owner of your business
2) 1% owner of your business whose annual pay was more than $150,000
2) Dependent Care 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 to the plan year being tested
b) An employee with gross annual compensation before deductions over $115,000 in the 12 months prior to the year being tests
Test #2 can be ignored if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.
Testing services are included for all Polestar Benefits administered plans.
Plans that favor highly compensated employees. If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement does not favor highly compensated employees.
A highly compensated employee for this purpose is any of the following employees.
1. An Officer
2. A shareholder who owns than 5% of the voting power or value of all classes of the employer's stock.
3. An employee who is highly compensated based on the facts and circumstances.
4. A spouse or dependent of a person described in (1), (2), or (3).
1) Key Employee Concentration Test: Demonstrates that no more than 25% of non-taxable benefits are provided to key employees. Key employees are defined as:
a) An officer having annual pay of more than $165,000
b) An employee who for 2012 is either of the following
1) 5% owner of your business
2) 1% owner of your business whose annual pay was more than $150,000
2) Dependent Care 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 to the plan year being tested
b) An employee with gross annual compensation before deductions over $115,000 in the 12 months prior to the year being tests
Test #2 can be ignored if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.
Testing services are included for all Polestar Benefits 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:
1) Employees with less than three years of service
2) Employees under age 25
3) Part-time or seasonal employees
4) Non-resident aliens
5) Collective bargaining employees
Generally, to satisfy eligibility requirements, a plan must benefit:
A) 70% or more of all non-exludable employees, regardless of whether they are highly or non-highly compensated
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.
1) Employees with less than three years of service
2) Employees under age 25
3) Part-time or seasonal employees
4) Non-resident aliens
5) Collective bargaining employees
Generally, to satisfy eligibility requirements, a plan must benefit:
A) 70% or more of all non-exludable employees, regardless of whether they are highly or non-highly compensated
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
Premium Only Plan < 100 Participants = Discrimination Testing
Premium Only Plan > 100 Participants = Discrimination Testing
Flexible Spending Account < 100 participants = Discrimination Testing
Flexible Spending Account > 100 participants = Form 5500, Discrimination Testing, Schedule F
Group Health, Dental, Direct Reimbursement Dental > 100 participants = Form 5500, Schedule A
Premium Only Plan > 100 Participants = Discrimination Testing
Flexible Spending Account < 100 participants = Discrimination Testing
Flexible Spending Account > 100 participants = Form 5500, Discrimination Testing, Schedule F
Group Health, Dental, Direct Reimbursement Dental > 100 participants = Form 5500, Schedule A
