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Adjustment for Compliance Testing


Guest afreeling

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Guest afreeling

If a compliance adjustment is done for the 25% Key Employee Test to lower 3 of the key employee's annual elections for the FSA (since they were not allowed to have that much salary reduced on a pretax basis); and one of those Key Employees then has a qualifying event a few months later allowing to increase their election, if the employer hires more non-keys in the meantime, can the one Key increase thier annual election due to the qualifying event, even if they have lowered it due to compliance? I do not think that this is possible, but wanted a second opinion. Thanks.

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As a practical matter, much depends on when, during the year, your TPA does the testing and how proactive they would be to changing employee populations. If the test is done early enough in the plan year, then the prospective salary reductions can effectively be suspended. The key employee concentration test looks at whether the test is met for the plan year, not at whether the test is met at a particulat point in time during the plan year. If the TPA is sufficiently proactice and can track the enrollment elections of new hires enough to allow a recalculation of the test, then it may be possible for the coverages to be prospectively permitted. At the end of the day, however, it may be prohibitively expensive for the employer to have the TPA continually tinker with the test.

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afreeling: I believe it is possible. The plan should be in compliance on any given day of the plan year. If the test can be passed on the date that the key man's change was made, I see no reason to disallow. It's a new event, new circumstances.

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