Nondiscrimination Testing for Section 125 Plans

Most employers know Section 125 “Flex” plans and their various component benefits (FSAs, Dependent Care, group insurance premiums, etc.) are subject to nondiscrimination rules.  But did you know not complying with the nondiscrimination rules could result in taxation of employees’ benefits?  Or worse, the revocation of an employer’s ability to offer this type of pre-tax plan at all?  

The 2007 Proposed Regulations clarified that, upon review, employers must be able to prove these tests were run and passed each plan year.  But running these tests is not a simple process.  It requires work, time and cost.  In order for Alliance Benefit Group North Central States, Inc. to perform Section 125 nondiscrimination testing, an employer must provide very specific and detailed information, twice.  First in the middle of the plan year and then again after the plan year has ended.  We might even ask the employer to provide that information more than twice, depending on the results of the tests.  ABGNCS also charges employers a fee to perform these tests.  

So the question is, is it worth it?  Do employers really need to have this done year after year?  Even if the results are always passing?  The answer is yes!

Remember Section 125 plans offer employees a very significant savings.  

Contributions to Section 125 plan benefits are not subject to federal, state, Social Security or Medicare taxes.  Depending on their income tax bracket, an employee could save 25% - 40%, or more!  These plans also save employers Social Security and Medicare tax, which equals 7.65% savings on all funds run through the plan. 

The ability to provide these savings is threatened if an employer doesn’t ensure their plan is following the rules, which makes nondiscrimination testing an invaluable service!     

The Author: Sadie Wuerflein, CFC

Account Executive - FSA/HRA/HSA

abgncs.com/HSAFSAHRA

swuerflein@abg-mn.com