Average Benefits Test Under Dependent Care Assistance Program

[Guest Edward McElroy]

When an employer is running the 55% average benefits percentage test, does the employer consider all non-excludible employees or only those employees participating in the DCAP? For example, assume that an employer has 100 employees, of which 10 are HCEs and 90 are NHCEs. However, only one HCE and one NHCE are participating in the DCAP. The HCE contributes $5,000, while the NHCE contributes $2,750 (55% of $5,000). Does the DCAP satisfy the 55% test? It would if the employer only considers participating employees. It wouldn't if the employer must consider all non-excludible employees. Thanks in advance. Ed

[SLuskin]

It would be great if you could test only on those who elected daycare, or even on only those with eligible dependents. But that is not the case. In some cases, you can exclude those with less than 1 year of service or whose income is less than $25,000. Otherwise, it's everyone. The EBIA cafeteria bible has a great multi page explanation of these tests.

[Guest taylo]

I have a few questions regarding the 55% test:

1. If the plan allows all employees to enter on hire date, can you still exclude those with less than one year of service and under age 21 from the test?

2. Do you determine the HCE group using prior year gross compensation, or do you have the option of using current year.

3. If it is determined before the end of the year that a test is going to fail, even if you cut off HCEs, can you go back and re-categorize amounts that HCEs have put into the plan as taxable (through payroll) so the test will pass at year end?

Thanks for any help you can give me. I have researched this and can't find anything that specifically addresses these questions.