Our compliance page contains useful educational information on some of the IRS regulations surrounding the Premium Only Plan (POP), Flexible Spending Account (FSA), and Transportation plans. This page is intended to assist you in determining if you are eligible to implement these benefits based on your employer’s demographic.
Section 125 Plan Eligibility
Market reform rules under the ACA require that the employer offer a Group Health Plan in order to offer a health flexible spending arrangement. Also, those eligible for the health flexible spending arrangement must be eligible for the Group Health Plan.
More than 2% owners of an S-Corp (and their spouse, children, grandchildren, and parents), partners in a partnership, and some members of an LLC are not eligible to participate in a Section 125 plan—this includes the premium only plan as well as the Health or Day Care Flexible Spending. Market reform rules under the ACA require that the employer offer a Group Health Plan to any employee that is eligible for the health flexible spending arrangement.
If a domestic partner qualifies as dependent under IRA rules, then that domestic partner’s health premiums could be deducted pre-tax under a cafeteria plan and the domestic partner’s expenses could be reimbursed by the employee’s health care flexible spending arrangement.
Navia provides annual nondiscrimination testing (NDT). The annual test is conducted at the end of each year. All plans are required to complete end of the year testing to determine whether a plan discriminates in favor of Highly Compensated Employees (HCEs) or Key Employees (KEYs). No Plan is exempt from testing.
Navia also provides nondiscrimination pretesting at the beginning or middle of the year for plans that anticipate problems passing the tests. The pretest allows employers to make mid-year adjustments to benefits to avoid failing end of the year tests. You are responsible for notifying us and requesting the test if you see any potential issues with nondiscrimination testing.
The Section 125 Plan NDT includes the following:
Premium Conversion Plan Tests (Section 125)
- Eligibility Test
- Contributions and Benefits Test
- Key Employee Concentration Test
Health Flexible Spending Arrangement (Section 105)
- Eligibility Test
- Benefits Test
Day Care Flexible Spending Arrangement (Section 129)
- Eligibility Test
- Contributions and Benefits Test
- More-than-5% Owner Concentration Test
- 55% Average Benefits Test
Nondiscrimination Testing Overview
There are 5 distinct aspects of nondiscrimination testing.
This test looks at who is asked to participate in the Section 125 plan. You must have at least some non-Highly Compensated Employees eligible to participate in the plan.
CONTRIBUTIONS & BENEFITS TEST
This test has several sub-tests. All employees should receive the same amount of employer contributions, the eligibility rules should be the same for all employees, and the same benefits must be provided to all employees.
THE KEY EMPLOYEE CONCENTRATION TEST
This test compares the nontaxable benefits provided to Key Employees to the nontaxable benefit provided to all employees. Nontaxable benefits include the value of the group medical premium, contributions to a Flexible Spending Arrangement, contributions to an HSA, and contributions to any other benefit provided under the Section 125 Plan. The value of nontaxable benefits provided to Key Employees cannot exceed 25% of the total nontaxable benefits provided under the plan.
55% AVERAGE BENEFITS TEST
This test looks at the average day care benefits provided to Highly Compensated Employees as compared to the average day care benefits provided to non-Highly Compensated Employees. Know who is participating in your Day Care FSA—plans fail this test most often. If you have HCEs in the Day Care FSA, non-Highly Compensated Employees must receive 55% or more of the benefits under the plan. PLEASE SEE “RED FLAGS” BELOW.
5% OWNER TEST
More than 5% Owners cannot elect more than 25% of the total amount elected under the Day Care FSA.
HIGHLY COMPENSATED EMPLOYEE (HCE)
Whether an individual is a Highly Compensated Employee depends on their status during the prior plan year (or the current year in the case of the first year of employment).
- An Officer; or
- An owner of more than 5% of the Employer, voting power, or value of all classes of stock; or
- An Employee who earned in excess of $120,000 in the 2018 Plan Year (if testing 2019) or $125,000 in the 2019 Plan Year (if testing 2020).
- A spouse or dependent of an individual described above that works for the same Employer.
KEY EMPLOYEE (KEY)
Whether an individual is a Key Employee depends on their status during the prior plan year. Note: Government entities do not have Key Employees.
- An Officer who earned in excess of $175,000 in the 2018 plan year ($180,000 in the 2019 plan year); or
- A more than a 5% owner; or
- A more than a 1% owner receiving compensation in excess of $150,000 in the prior plan year.
More than 2% owners of an S-Corp (and their spouse, children, grandchildren, and parents), partners in a partnership, and some members of an LLC are not eligible to participate in a Section 125 plan—this includes the premium only plan as well as the Health or Day Care Flexible Spending. In the event these individuals are participating in the plan please promptly remove them and do not consider them for any of the test questions.
An officer is an employee with the authority of an administrative executive. Thus, if an employee has an officer’s title, but does not have the authority, he is not considered an Officer. Similarly, an employee who has the authority but not the title is considered an officer. Whether an individual is considered an Officer is based on all the facts and circumstances (e.g. nature and extent of duties, authority, and continuity of service).
Nondiscrimination Test Red Flags
If your plan contains any of the following situations or plan designs please contact our team at email@example.com to have your plan reviewed and tested.
- Only HCEs are eligible for Premium Conversion Plan or the Health & Day Care FSA;
- The plan excludes a high percentage of employees (part-time, seasonal, etc.);
- Not all employees receive the same employer contributions toward medical premiums;
- KEYs or HCEs receive more employer contributions toward medical premiums;
- Disparate waiting periods (salary wait 30 days, hourly wait 90 days);
- Different benefits provided to employees;
- Only 5% Owners are participating in the Day Care FSA;
- The plan has >25% of KEYs eligible and/or contributing to the medical plan or FSA;
- Only HCEs are participating in the Day Care FSA;
- Only one participant in the Day Care FSA and that participant is an HCE.
Plans frequently fail the Day Care Test. The plan cannot have only HCEs participating in this portion of the plan or it will fail.
Sec 132 IRS regulations state that a cash reimbursement may not be provided to an Employee for eligible transit expense if a voucher is readily available to the Employer for distribution to the Employee. Metro areas across the nation have different mass transit programs, so this will vary by city.
Vouchers (or similar) are considered readily available if: (1) the Employer can obtain the vouchers on the same or better terms as the Employee and (2) a significant administrative cost is not incurred by the Employer in obtaining the vouchers
The administrative cost is considered “significant” if your local transportation fare provider imposes costs in excess of 1% of the annual value of the voucher.