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125 plan with only HCEs


Guest cshade
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Guest cshade

Can a company have a 125 plan with only HCEs. This group employs 5 HCEs and no non-HCEs. My first thought is no because the HCEs would receive 100% of the benefit, however, since they employ no non-HCEs, the plan isn't really discriminating against non-HCEs. Any thoughts or direction would be appreciated. Thanks!

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It depends on whether among the HCEs there are any Key Employees (416i) and non Key Employees. From a discrimination testing perspective, if all you have are HCEs, then generally that should not be a problem. If the 125 plan has health flex accounts, then section 105h is implicated too. The discrimination test there is between the lowest paid 75% and highest paid 25% of your all HCE group.

There is also a 25% concentration test. That is, no more than 25% of the tax-free benefits under the 125 plan can benefit key employees. So, for every dollar the key employees can receive tax-free, there must be non-key employees benefiting $3.

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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