Section 125 Discrimination Testing

Nondiscrimination testing to ensure there is not discrimination in favor of highly compensated individuals section 125 requires cafeteria plans to pass three tests an eligibility test a contributions and benefits test and a key employee concentration test.

Section 125 discrimination testing. The general consequence of the failure of the tests is that the highly compensated employees will have taxable income relative to the discriminatory benefits they receive. If you also offer health flexible spending account fsa or dependent care fsa benefits there are additional tests to complete. The section 125 discrimination rules generally incorporate the nondiscriminatory classification test under code section 410 b that applies to qualified retirement plans.

Contributions and benefits test 3. The section 125 cafeteria plan 1. There are nine different tests that can be applicable to benefits provided under a section 125 plan.

If you sponsor a cafeteria section 125 plan there are three tests to complete. The irs imposes nondiscrimination rules on section 125 plans also known as flexible benefit plans cafeteria plans or pre tax premium plans and self funded group health plans. They are to be performed and kept on file to produce in the event of a plan audit.

Simply click on the test s that pertain to your plan to learn more. As noted above some tests are related to eligibility and availability of benefits and other tests are based on actual benefits elected utilization. Section 125 sets forth the nondiscrimination rules that apply to cafeteria plans.

Self insured medical reimbursement plans that are offered under a cafeteria plan which is generally the case must also pass section 105 h nondiscrimination testing which determines whether reimbursements made under the plan are taxable. If testing is performed. The purpose of the rules is to prevent employers from favoring highly compensated employees to an impermissible degree.

All of the possible tests are listed below. However this test is modified by substituting highly compensated individuals and highly compensated participants for highly compensated employees. In order to be in compliance with laws governing pre tax treatment of insurance premiums your business must have a section 125 plan document and annual testing in place as defined by the code.