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What plans are subject to nondiscrimination testing?
The IRS requires non-discrimination testing for employers who offer plans governed by Section 125, which includes a flexible spending account (FSA). And though they aren’t part of Section 125, testing is also required for health reimbursement arrangements (HRAs) and self-insured medical plans (SIMPs).
Who can be excluded from nondiscrimination testing?
There are two categories of prohibited groups recognized in the nondiscrimination rules — “highly compensated” individuals and “key employees.” An individual will be considered highly compensated and/or a key employee based on one or more of the following: Status as an officer. Ownership interest. Compensation.
When should nondiscrimination testing be done?
Nondiscrimination testing typically occurs during the 4th quarter of the plan year because the IRS requires that the tests pass as of the last day of the plan year.
Who is included in nondiscrimination testing?
What is nondiscrimination testing? Nondiscrimination testing requires that employees of a certain status (highly-compensated employees and Key employees) stay within a specific contribution rate, as determined by the contribution rate of NHCEs.
What is 403 B plans are exempt from nondiscrimination testing?
One of the benefits of a qualified Section 403(b) retirement plan is that elective deferrals are not subject to nondiscrimination testing. All employer contributions, on the other hand, must demonstrate that contributions do not discriminate in favor of highly compensated employees (HCE).
Does non-discrimination testing apply to HSA?
An HSA can be offered as part of a Section 125 Cafeteria Plan to allow employees to make pre-tax payroll contributions to their HSAs. Once an employer allows employees to make pre-tax contributions, the Section 125 non-discrimination testing rules apply instead of the HSA comparability rules.
Is FSA nondiscrimination testing required?
A dependent day care FSA must pass four nondiscrimination tests. These tests measure eligibility, availability and utilization. Testing is required by section 129 of the Internal Revenue Code.
Are HSA subject to nondiscrimination testing?
However, contributions, including matching contributions, to an HSA made under a cafeteria plan are subject to the section 125 nondiscrimination rules (eligibility rules, contributions and benefits tests and key employee concentration tests).
How do you conduct a nondiscrimination test?
To conduct this test, you need two percentages:
- Annual HCE contribution rate: Divide the average deferrals of your HCE employees by their average annual compensation.
- Annual NHCE contribution rate: Divide the average deferrals of your NHCE employees by their average annual compensation.
Is non discrimination testing required for HSA?
Employers contributing through a Section 125 plan are not subject to the comparability rules described above, but are subject to HSA nondiscrimination testing rules that ensure contributions do not favor highly compensated employees.
Are 403b plans subject to top heavy testing?
The top-heavy determination does not apply to 403(b) plans.
Can 403b plans discriminate?
403(b) plans sponsored by governmental entities are generally exempt from nondiscrimination testing, with the exception of the universal availability requirement under Code Section 403(b)(12) and compensation limit under Code Section 401(a)(17). That leaves the 501(c)(3) entities sponsoring 403(b) plans.
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).
Can you discriminate for HSA contributions?
Contributions to an HSA made through a cafeteria plan are subject to the section 125 nondiscrimination rules. (These rules allow contributions in different amounts to different groups of employees as long as the contributions to not discriminate in favor of highly compensated employees.)
Can an employer discriminate on HSA contributions?
The quick answer is, “Yes they can.” However, understanding how this is possible could help you avoid discriminatory missteps that wouldn’t result in the same answer.
What does nondiscrimination testing mean?
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.
Are 403 B plans subject to ADP testing?
As a trade-off to the universal availability requirement (described above), 403(b) plans are not required to pass the ADP test. This allows any highly compensated employees to maximize their deferrals.
Are 403 B plans subject to top heavy testing?
Do safe harbor plans require coverage testing?
A safe harbor plan requires tests other than non-discrimination, entails proper administration to satisfy the plan design and can benefit from testing for plan optimization.
What happens if you fail FSA nondiscrimination testing?
Tax Consequences if Nondiscrimination Test Failed Generally, only members of the prohibited group are adversely affected if a plan fails one of the DCAP nondiscrimination test — they will lose the benefit of the applicable tax exclusion and have the value of the benefit included in their income.
What are the nondiscrimination tests for self-insured health plans?
Section 105 (h) of the Code subjects self-insured healthcare plans to the following nondiscrimination tests to ensure that benefits are not provided disproportionately to members of a “prohibited group”: An eligibility test.
Which ERISA health and welfare plans are subject to non-discrimination testing?
The following ERISA health and welfare plans are subject to non-discrimination testing: Generally, group life insurance plans satisfy the nondiscrimination rules by design. NOTE: Health Care Reform applied the §105 (h) nondiscrimination rules to non-grandfathered insured plans effective for plan years beginning after 9/23/2011.
What is the Section 105 (H) eligibility test for self-insured health reimbursement plans?
The section 105 (h) eligibility test is similar to the test applicable to qualified retirement plans — a self-insured health reimbursement plan must satisfy one of the following three alternative tests: The 70% Test — The plan must benefit at least 70% of all non-excludable employees
When should I perform a nondiscrimination test?
IRS regulations require nondiscrimination testing to be performed by the last day of the plan year; however, it is recommended that employers conduct a pre-test mid plan year to determine if any corrective steps need to be taken in the event the plan discriminates.