Cafeteria plan discrimination testing when all hcp or key employees

[billfgrady]

How is the discrimination test under Section 125(B)(1) and the key employee percentage test under Section 125(B)(2) applied in a setting where an employer has five employees, all of whom are 5% owners?

[papogi]

Are they exactly 5% owners, or are they over the 5% threshold?

[billfgrady]

20% each.

[papogi]

In this case, all individuals are considered key employees, and must be taxed on their option to receive cash. This undoes the 125 plan as if it never existed. This is the problem in setting up 125 plans for employers who are so small that they can't pass the key employee test.

[Kirk Maldonado]

Given the tax savings involved, it may make sense to set them up for the rank and file employees, if you have some of them. Just because the owners can't participate doesn't mean you should not have one. Remember it saves taxes for the employer as well as the employees.

[papogi]

billfgrady says there are only 5 employees, and they are all key.

[Kirk Maldonado]

Your last comment wasn't specifically limited to the particular facts at hand; I thought it was overbroad.