Limiting the number of HC and Key Employees for nondiscrimination test

[Guest Joe Vasko]

Can a Section 125 Plan limit the number of HCEs and Key employees when performing the nondiscrimination tests. I know in a qualified retirement plan you can limit the number of HCEs by using the top paid group and keys can be limited to the lesser of 3 or 10% of all employees. Do these same rules apply to 125 Plans.

[SLuskin]

You can't limit the number of key employees. If a person fits the definition of key, they are key.

However, you can elect the top 20% for HCE, as long as that election is consistent for every benefit plan. In other words, you can't take the top 20% election for the Cafeteria Plan and then take the straight over $90K definition for the 401K plan.

[Guest Joe Vasko]

Thanks for your response. What if the only two employees participating in the dep. care FSA are HCE's. I could limit the HCE's to the top paid group (20%, like their 401(k) Plan does). Can this be done to pass the 55% Test for dep. care expenses.

Joe

[Medusa]

Joe,

I believe you are confusing the limit on the officer count with a limit on the key employee count. The limits you describe do indeed apply to officer determination. And these rules apply to 125 plans as well as qualified plans.

[SLuskin]

I usually call the 401K administrator to find out how they test and do it the same way. Once in awhile, the dcap testing only works using the top 20% election. Then I try to convince the 401K plan to do it the same way.

But once they are defined hce, if they are the only ones who want the dcap, then they can't have it at all.