Transcript Slide 1

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
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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
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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
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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
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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
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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
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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 convenience
Compliance Department
608 831 8445
800 346 2126
[email protected]
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