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FSA Discrimination Testing


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I have a question regarding the discrimination testing, High Comp Employees and a flex plan. We have a company that all the employees would quailify as highly comp. Can you still have a flex plan if all the employees are HCE's? I would think so since it is not discriminating against any one since they are all HCE but I could not find anything on it.

Thanks

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I have a question regarding the discrimination testing, High Comp Employees and a flex plan. We have a company that all the employees would quailify as highly comp. Can you still have a flex plan if all the employees are HCE's? I would think so since it is not discriminating against any one since they are all HCE but I could not find anything on it.

Thanks

How about changing the definition of HCE to include only the top 20% in compensation? Then you can have the plan.

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I have a question regarding the discrimination testing, High Comp Employees and a flex plan. We have a company that all the employees would quailify as highly comp. Can you still have a flex plan if all the employees are HCE's? I would think so since it is not discriminating against any one since they are all HCE but I could not find anything on it.

Thanks

Are they also all key employees? If so, the 25% concentration test would mean no cafeteria plan benefits for the keys, as they as a group may only have $1 of benefits for every $3 the non-keys have as a group. If you have non-keys and they have benefits, then keys as a group may have 1/3 that amount.

Are the FSAs health, day care or adoption assistance? If health, then 105h only considers in its testing the highest 25% paid as 'highly compensated' and compares them against the other 80% of employees. 105h does not use the 414q HCE definition.

If day care FSAs, then 129d8 requires that average benefits of non-HCEs (414q definition) be at least 55% of average benefits of HCEs (414q definition). In that case, SLuskin's suggestion may solve your dilemma.

If adoption assistance FSAs, eligibility classifications may not favor 414q HCEs. But then, that should be no problem--make the eligibility rules apply equally to HCE and non-HCE alike, despite having no non-HCEs. There is also a requirement there that not more than 5% of the benefits be for owners, their spouses and dependents.

Proposed regulations also spells out some tests for not discriminating in favor of 'highly compensated individuals' (HCIs). Prop Treas Reg § 1.125-7a9 defines highly compensated by reference to the 414q compensation threshold. Treas Reg § 1.125-7b1 requires nondiscriminatory eligibility classifications. As with the adoption assistance FSA, you could simply have eligibility rules apply equally to HCIs and non-HCIs alike, even though you have no HCIs.

Also, there must be no discrimination in favor of HCIs eligible to participate--HCPs--as to tax-free benefits or total benefits, or ER contributions allocable to either tax-free benefits or total benefits. The absence of non-HCPs should not be a problem here, as the test does not require non-HCPs to have benefits against which the HCPs benefits are measured. Prop Treas Reg § 1.125-7c. There is a safe harbor for health benefit coverage if the contributions for each participant is 100% of the cost of health benefit coverage for the majority of similarly situated HCPs. Prop Treas Reg § 1.125-7e1i. That could be accomplished in the absence of non-HCPs. An alternate safe harbor for health benefit coverage applies if the contributions for each participant is at least 75% of the cost of health coverage for the similarly situated participant with the highest cost health benefit coverage under the plan. Prop Treas Reg § 1.125-7e1i. This too could be accomplished in the absence of non-HCPs.

The proposed regs require that all similarly situated participants be given a uniform opportunity to elect qualified benefits. When measured as a percentage of their aggregate compensations, the aggregate tax-free benefits elected by the HCPs must not be greater than the aggregate tax-free benefits elected by the non-HCPs. Similarly, all similarly situated participants be given a uniform election opportunity with respect to ER contributions, and when measured as a percentage of their aggregated compensations, the aggregate utilization of ER contributions by the HCPs must not be greater than the aggregate utilization of ER contributions by the non-HCPs. Prop Treas Reg § 1.125-7c2. It is difficult to imagine the elections of tax-free benefits or utilizations of ER contributions discriminates in favor of HCPs when there are no non-HCPs to elect tax-free benefits or utilize ER contributions.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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I have a question regarding the discrimination testing, High Comp Employees and a flex plan. We have a company that all the employees would quailify as highly comp. Can you still have a flex plan if all the employees are HCE's? I would think so since it is not discriminating against any one since they are all HCE but I could not find anything on it.

Thanks

Are they also all key employees? If so, the 25% concentration test would mean no cafeteria plan benefits for the keys, as they as a group may only have $1 of benefits for every $3 the non-keys have as a group. If you have non-keys and they have benefits, then keys as a group may have 1/3 that amount.

Are the FSAs health, day care or adoption assistance? If health, then 105h only considers in its testing the highest 25% paid as 'highly compensated' and compares them against the other 80% of employees. 105h does not use the 414q HCE definition.

If day care FSAs, then 129d8 requires that average benefits of non-HCEs (414q definition) be at least 55% of average benefits of HCEs (414q definition). In that case, SLuskin's suggestion may solve your dilemma.

If adoption assistance FSAs, eligibility classifications may not favor 414q HCEs. But then, that should be no problem--make the eligibility rules apply equally to HCE and non-HCE alike, despite having no non-HCEs. There is also a requirement there that not more than 5% of the benefits be for owners, their spouses and dependents.

Proposed regulations also spells out some tests for not discriminating in favor of 'highly compensated individuals' (HCIs). Prop Treas Reg § 1.125-7a9 defines highly compensated by reference to the 414q compensation threshold. Treas Reg § 1.125-7b1 requires nondiscriminatory eligibility classifications. As with the adoption assistance FSA, you could simply have eligibility rules apply equally to HCIs and non-HCIs alike, even though you have no HCIs.

Also, there must be no discrimination in favor of HCIs eligible to participate--HCPs--as to tax-free benefits or total benefits, or ER contributions allocable to either tax-free benefits or total benefits. The absence of non-HCPs should not be a problem here, as the test does not require non-HCPs to have benefits against which the HCPs benefits are measured. Prop Treas Reg § 1.125-7c. There is a safe harbor for health benefit coverage if the contributions for each participant is 100% of the cost of health benefit coverage for the majority of similarly situated HCPs. Prop Treas Reg § 1.125-7e1i. That could be accomplished in the absence of non-HCPs. An alternate safe harbor for health benefit coverage applies if the contributions for each participant is at least 75% of the cost of health coverage for the similarly situated participant with the highest cost health benefit coverage under the plan. Prop Treas Reg § 1.125-7e1i. This too could be accomplished in the absence of non-HCPs.

The proposed regs require that all similarly situated participants be given a uniform opportunity to elect qualified benefits. When measured as a percentage of their aggregate compensations, the aggregate tax-free benefits elected by the HCPs must not be greater than the aggregate tax-free benefits elected by the non-HCPs. Similarly, all similarly situated participants be given a uniform election opportunity with respect to ER contributions, and when measured as a percentage of their aggregated compensations, the aggregate utilization of ER contributions by the HCPs must not be greater than the aggregate utilization of ER contributions by the non-HCPs. Prop Treas Reg § 1.125-7c2. It is difficult to imagine the elections of tax-free benefits or utilizations of ER contributions discriminates in favor of HCPs when there are no non-HCPs to elect tax-free benefits or utilize ER contributions.

No key employees and no dependent care. Just salespeople who all make over 100,000 a year

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Having no key EEs, the 25% concentration test poses no problem/challenge.

For health flex accounts, you yet have to be concerned about not discriminating in favor of the 25% highest paid salesmen vis-a-vis the other 75%. This is so under 105h even though all are HCEs per 414q definition.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Are you sure that all employees are salespeople ?

Who answers the telephone, does the order processing, payroll, bookkeeping, order fullfilment etc ?

Are you sure that ALL salespeople are highly compensated ?

What about newer salespeople who are not yet up to par or underperformers ?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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