Users' questions

Is Section 125 nondiscrimination testing required?

Is Section 125 nondiscrimination testing required?

The IRS requires non-discrimination testing for employers who offer plans governed by Section 125, which includes a flexible spending account (FSA).

What happens if you fail FSA nondiscrimination testing?

A health care FSA cannot discriminate in favor of highly compensated individuals as to benefits provided under the plan. If a HFSA fails either the eligibility or benefits test, the favorable tax treatment for highly compensated individuals participating in the plan will be lost.

What is cafeteria plan testing?

Background: The cafeteria plan nondiscrimination tests are a series of tests that are required annually by the Internal Revenue Service (IRS) to determine if a cafeteria plan unjustly favors higher-paid individuals or those in charge within an organization.

Is nondiscrimination testing required?

All employers, regardless of business type or size, are required to perform annual nondiscrimination tests or hire a third party to conduct testing on their plan.

What is nondiscrimination testing?

Nondiscrimination tests on a cafeteria plan are a series of tests that are required by the Internal Revenue Service (IRS) to determine if a cafeteria plan that includes benefits like a health care flexible spending account (HCFSA), dependent care flexible spending account (DCFSA), pre-tax premiums under a cafeteria …

What is nondiscrimination testing for FSA?

Compliance testing (also known as non-discrimination testing) ensures that a company’s Medical or Dependent Care FSA treat all employees equally, and do not favor key or highly-compensated employees (HCEs).

Why does plan perform nondiscrimination testing?

In the most basic terms, nondiscrimination tests (NDTs) are annual tests required to ensure that 401(k) retirement plans benefit all the employees, (not just business owners or highly-paid employees). Failing to meet the IRS’s standards can mean fines, penalties, and bureaucratic headaches.

What is the purpose of FSA nondiscrimination testing?

How do you do a nondiscrimination test?

Standard Nondiscrimination Testing: ADP, ACP, and Top Heavy Tests

  1. Step #1: Calculate Annual HCE Deferral Rate.
  2. Step #2: Calculate Annual NHCE Deferral Rate.
  3. Step #3: Compare and Make Your Determination.
  4. Step #1: Calculate Annual HCE Contribution Rate.
  5. Step #2: Calculate Annual NHCE Contribution Rate.

What does nondiscrimination mean?

Definition of nondiscrimination : the absence or avoidance of discrimination … officially affirming a federal government policy of nondiscrimination in employment.—