Key points • Nondiscrimination Testing IRS Requirements • What is included in our testing services • Common worksheet errors • Testing failure reasons • Outside factors that impact testing results
Nondiscrimination Testing IRS Requirements • Mandated testing for each plan year • BESTflex plans have 9 required tests • Test and results may be requested at audit • Fees associated with failure to test • Failure of a test results in taxation penalties
What is included in our testing services • All 9 tests • Worksheet and workbook materials • Phone or e-mail assistance • Education on how to correct failures • Testing result notification • Record-keeping of results and tests • Guidance to prevent failures
What is included in our testing services For each type of benefit, various testing is performed • Health Care FSA (Section 105) • Eligibility Test * • Benefits Test • Dependent Care FSA (Section 129) • Eligibility Test • Contributions and Benefits Test • 55% Average Test * • 25% Owner Concentration Test • Cafeteria Plan (Section 125) • Eligibility Test • Contributions and Benefits Test * • 25% Concentration Test (key employee test) * * Most common tests that fail
Common worksheet errors • Many fail letters sent due to inaccurate data • Cafeteria Plan components incorrect • Officer listed as incorrect individual • Compensation listed as W-2 wages • Compensation reports wrong period • Employees inactive during plan year listed • Eligibility listed incorrectly • Employee list limited
Common worksheet errors • Cafeteria Plan components incorrect • Appears self-employed individual is participating • Utilization of highly-compensated appears larger or smaller than actual • Officer • Number of officers appears larger • Safe Harbor tests pass in error
Common worksheet errors • Compensation reports W-2 wages • Employee classified as non-highly compensated in error • Inability to list employees from highest-paid to lowest-paid • Compensation reports wrong period • Employee classified as highly compensated in error
Common worksheet errors • Employees not active during plan year listed • Overall employee count increases • Total compensation increases • Utilization of plan appears lower • Eligibility listed incorrectly • Tests completed or skipped in error • Total compensation reported inaccurately • Ratios appear more or less balanced
Common worksheet errors • Employee list limited • Only eligible employees listed • Eligibility testing results not accurate • Employees identified as non-highly compensated in error • Utilization percentages inaccurate • Terminated employees not listed • Eligibility testing results not accurate • Employees identified as non-highly compensated in error • Related Employer employees not listed • Eligibility testing results not accurate • Employees identified as non-highly compensated in error • Utilization percentages inaccurate
Testing failure reasons • Health Care FSA (Section 105) • Eligibility Test * • Reasons • Health Care FSA participation top-heavy • Includes top 25% by pay regardless of compensation or authority as “highly compensated” • Options to avoid failure • Increase participation among lower-paid • Decrease participation among higher-paid • Limit eligibility to only full-time employees • Offer an employer contribution for all eligible employees into a Health Care FSA *Most common tests that fail
Testing failure reasons • Health Care FSA (Section 105) • Benefits Test • Reasons • Waiting period discrepancies • Different maximum for groups of employees • Options to avoid failure • Same waiting period for all eligible • Same maximum election for all eligible
Testing failure reasons • Dependent Care FSA (Section 129) • Eligibility Test • Reasons • Too many ineligible employees • Options to avoid failure • Hire less seasonal or part-time employees • Expand eligibility • Contributions and Benefits Test • Reasons • Offering onsite daycare to some employees only • Different maximums for groups of employees • Options to avoid failure • Offer same benefits to all eligible employees
Testing failure reasons • Dependent Care FSA (Section 129) • 55% Average Test * • Reasons • Very small percentage of employees are owners or highly compensated individuals and one of them participates • Not many non-highly compensated individuals elect Dependent Care FSA • Options to avoid failure • Owners and highly compensated individuals do not participate • Owners’ and highly compensated individuals’ maximums are reduced based on preliminary test findings • Constant monitoring in case of election changes • Constant monitoring in case of new hires • Can only modify by reducing election during plan year *Most common tests that fail
Testing failure reasons • Dependent Care FSA (Section 129) • 25% Owner Concentration Test • Reasons • More than 5% owners participate in Dependent Care FSA • Not many employees elect Dependent Care FSA • Options to avoid failure • More than 5% owners do not participate • More than 5% owners’ combined maximum is limited to 33% of all other employees’ total Dependent Care FSA dollars elected • Constant monitoring in case of election changes • Can only modify by reducing election during plan year
Testing failure reasons • Cafeteria Plan (Section 125) • Eligibility Test • Reasons • Too many ineligible employees • Options to avoid failure • Hire less seasonal or part-time employees • Expand eligibility
Testing failure reasons • Cafeteria Plan (Section 125) • Contributions and Benefits Test * • Safe Harbor pass if company pays 75% or more of every health plan premium for every eligible employee • Reasons for failure • Owner, officer, and highly compensated individuals comprising large percentage of the pre-tax insurance premiums • Owner and/or officer participates in pre-tax insurance premiums and the disparity in compensation is not great • Options to avoid failure • Increase participation in pre-tax insurance premiums • Avoid 100% employer-paid single insurance plans • Increase owner and/or officer compensation • Owner and/or officer pay share of insurance premiums post-tax • Decrease eligibility of employees *Most common tests that fail
Testing failure reasons • Cafeteria Plan (Section 125) • 25% Concentration Test (key employee test)* • Reasons for failure • Key Employees participate to a more than 25% extent in total Cafeteria Plan benefit plans • Not many employees have pre-tax insurance or FSA elections • Options to avoid failure • Key Employees pay portion of insurance premiums post-tax • Avoid 100% employer-paid single insurance plans *Most common tests that fail
Outside factors that impact testing results • Large changes in number of employees • Implementing a HDHP • Changing plan year • Employees’ children aging out of Dependent Care • Economy
Outside factors that impact testing results • Large changes in number of employees • Mass layoffs • Lowers participation among non-highly compensated employees • Section 105 Eligibility Test at risk • Mass hiring • New employees are ineligible: Section 129 and 125 Eligibility Tests at risk • New employees are eligible and do not elect Health Care FSA: Section 105 Eligibility Test at risk
Outside factors that impact testing results • Implementing a HDHP • Section 105 Eligibility Test risks • Higher interest among lower-paid individuals • Alleviates most interest in Health Care FSA due to HSA interaction • Limited Health Care FSA not as appealing • Section 125 Contributions & Benefits Test risks • Pre-tax HSA contribution inequality • Maximum allowable restricted based on family structure
Outside factors that impact testing results • Changing plan year • Involves running a short plan year • May decrease interest for non-highly compensated • Highly compensated may continue to elect causing failures • Employees’ children aging out of Dependent Care • Highly compensated individual continues to elect • Non-highly compensated individuals drop
Outside factors that impact testing results • Economy • Employees feel need to save • Employee becomes ineligible for Dependent Care elections due to spouse not employed • Employees’ spouses’ employer implements HDHP • Premium rate increases • Greater percentage of compensation in Section 125 Contributions & Benefits Test • Employees change from family to single coverage
Summary of key points • Annual plan testing required • Testing services included in annual renewal fee • Accurate and complete worksheet needed for accurate results • Complexity of tests and various definitions of highly compensated make pass/fail predictions difficult • Even preliminary testing is not a guarantee • Main ways to avoid failure • Reasonable eligibility standards • Higher Health Care FSA participation (employer contribution) • No Highly Compensated Individual participation in Dependent Care FSA • Have all employees pay a portion of premiums pre-tax • Unavoidable outside factors can cause failure
Questions? • Any questions can be addressed by e-mail or phone at your convenienceCompliance Department608 831 8445800 346 2126compliance@ebcflex.com Visit our online blog: http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx
