Section 127 Educational Assistance Program

[Guest fcdeacy]

This may seem like a dumb question and maybe it is.

How do you make sure that you are not discriminatory in favor of highly compensated employees? Use similar testing as for a 401(k) plan?

If you find that you are discriminatory, how do you fix the problem in this type of plan?

Any help you can provide would be much appreciated.

Thanks

[Lori Friedman]

Hasn't anyone ever told you that there are no dumb questions (except, of course, for the ones that I ask)?

There's a two-part nondiscrimination test for a Sec. 127 plan:

1. Eligibility test. If the plan isn't available to all employees, it must satisfy the coverage test of Sec. 410(b)(1)(B): the percentage of nonhighly compensated employees benefiting under the plan is at least 70% of the percentage of highly compensated employees who benefit. Sec. 127 "borrows" this test from qualified retirement plan rules. For more information, see Reg. Sec. 1.127-2(e)(1).

2. 5% concentraction test. The plan can't provide more than 5% of its benefits to more-than-5% owners (or their spouses or dependents). See Reg. Sec. 1.127-2(f)(2)(i).

Unfortunately, there's no "fix" for a discriminatory plan. If the plan is discriminatory for the plan year, all employees -- not just the highly compensated employees -- are taxed on all benefits received [Reg. Sec. 1.127-1©]. That's when an employer will want to scrutinize paid benefits and see if any amounts can be excluded (job-related education or working condition fringes) under another I.R.C. section.

This is a very brief and cursory discussion of some rather complicated law. I hope I've at least given you a place to start.