Discrimination Testing

[Guest MarcieMcA]

What type of discrimination testing must be conducted on a Premium Only Plan?

[papogi]

Premium Only Plans simply mean that whatever the employee elects in the 125 plan, the premiums can be taken pre-tax. You can still run into over utilization by key employees. Pre-taxed money effectively becomes the employer's money, and this is non-taxable benefits from the employer. In this sense, all the usual non-discrimination tests need to be applied, even to POP's.

[chris]

So a small employer may have discrimination testing issues where most of the principals are somewhat older and the majority of the staff are younger individuals?

[papogi]

No more than 25% of the total non-taxable benefits can be provided to "key employees" as defined in IRC (Concentration Test for Key Employees, or 25% test). This applies to all benefits available through the Cafeteria Plan, including Health Care and Dependent Care Spending Accounts. Basically, of all the dollars being run pre-tax through the 125 plan, no more than 25% of them can be associated with key employees. Not all older employees are "key employees," so that might not be a problem, but I do understand your point that older employees tend to be the key employees. If these key employees have lots of family coverage (they often don't since children are usually grown up and off the plan), and other high cost pre-tax benefits, and your rank-and-file employees tend to be young, single workers paying only for single coverage, then, yes, you may run into discrimination issues.

[Guest MarcieMcA]

Does the insurance company typically run the discrimination testing on a premium only plan or is it typically done by the Section 125 administrator?

[papogi]

You will have to check into your particular arrangement. Sometimes, it's the employer who handles this, sometimes an accountant, sometimes the TPA, etc. It really does vary. Remember that in order to determine who is a key employee under the EGTRRA guidelines, the tester will need access to ownership data (1% and 5% owners) and earnings data (those above the $130K and $150K threshholds).

[Guest MarcieMcA]

Thanks for all the information.