Discrimination Testing

[Guest Richard Scheer]

Client has a cafeteria plan with pre-tax medical insurance premiums and a health care/dependent care FSA. When you perform the annual non-discrimination tests, do you include the total cost of the health insurance (pre-tax employee share plus the amount paid by the Company) or only the amounts paid by the employees on a pre-tax basis. Of course, either way we will add in the FSA elections.

Thanks for your help.

[papogi]

Based on my understanding, you need to add in any employee contributions and any employer contributions for which there was a cash option. If an employee could have opted out of coverage and gotten increased wages from the employer (flex credits), then those need to be included, as well.

[Guest Richard Scheer]

So, if there is no cash option or opt-out added for those employees who do not want the insurance, then the employer's share is not included in the testing??

[g8r]

There is actually some dispute over this issue.

Some people (e.g., papogi) take the position that only amounts subject to the cash election are taken into account in running the 25% concentration test. The argument is that amounts not subject to a cash election aren't really part of the 125 plan.

The other argument is that all the premiums are taken into account. The support for this is that you get no benefit from the cafeteria plan if you didn't take into account the employer subsidy. In other words, by reducing your pay through the 125 plan, you get the benefit of having coverage. Thus, the full value of the coverage (the employee portion plus the employer portion) is taken into account. Similarly, people who take this position also think that if there is an employer subsidy for spousal or dependent coverage, the employer subsidy is taken into account if someone elects spousal or dependent coverage.

I know that Harry Becker at the IRS has takes this latter position.

Ultimately it is gray and it's hard to say if either position is more beneficial to the employer. It really depends on the facts. So, you need to take a position and apply it consistently.