Discrimination Testing

[Guest Kristine]

I am confused about Discrimination Testing. At my last job we had the employer fill out the Highly Comped and Key Employees Forms that's all - then we ran the test.

At my new job they want us to fill out a ton on of forms. Also if the employer is taking their insurance premiums out pretax and we do not tack them- they are saying that we still need to find out he amounts for that and run tests on those. In addition, they are saying that we have to run the tests at the beginning of the year, middle of the year and at the end of the year.

Can someone please help me!!??

[LRDG]

Usually NHC/HC-Key employee census data/forms are sufficient for discrimination testing.

How did your employer test the premium portion of the plan last year? If this is a new client is there another plan you can refer to? How was premium data collected in prior plan years/other plans? Is the employer self administering the Premium portion of the 125 plan via payroll administration, if so according to the administrative contract, who is administering compliance on premiums? Is premium conversion included in the administrative contract, if so pro-bono or fee for service? Is premium conversion included in the Plan Doc?

The 'ton of forms' may be related to collecting pre-tax premium data. If so, run a test on the FSA then test manually with NHC/HC/Key with FSA and premiums.

This was not an uncommon problem when 125s' were new. premiums present an administrative burden particularly with multiple plan options and benefits.

[jmor99]

..".............and we do not tack them........." What does "tack them" mean? To run anti-disc tests on a 125 plan you have to count every pre-tax dollar going thru it, which includes insurance premiums, FSA dollars and Day Care dollars. Additionally, there's a separate 55% test for Day Care.

Running the test once a year is enough. HOWEVER--if it's a small employer, you might have to run it more often due to employee turnover or election reductions, especially if their test results are running dangerously close to the failure limit. I've seen cases on very small employers where it had to be run every time a non-key employee lowered his election (due to a qualifying event) or terminated employment.

[Bob R]

I believe the term was "track" instead of "tack" and the issue relates to whether employer paid premiums must be taken into account in running the test. A very quick example - total premium for individual health coverage is $1,000. To obtain coverage through cafe plan, employee must elect to contribute $400. The question is whether the $600 from the employer paid portion (that is not subject to a cash election) is taken into account in running the 25% concentration test. In other words, do you treat it as $1000 or as $400 (the amount going through the cafe plan).

Most people use $1000 in the above example based on informal IRS comments that the individual obtained coverage worth $1000 by paying in $400 pre-tax. Some people only use $400, but they are in the minority.

[LRDG]

Kristine hasen't commented, so there's no clarification on hir part on which to provide a more accurate reply.

However, I'm not convenienced that the example of $1000 as outlined in Rob R's post is accurate. It seems to be the result of some confusion based on proposed Sec. 89 non-discrimination testing rules. Sec. 89 was repealed effective in 1989.

Unless there are plan design issues not disclosed in the example, most administrators of Cafeteria Plans would not include the $600 employer paid portion of the premium for non-discrimination testing purposes.

ER paid premium contributions are not included in EE taxable income without the existance of a Sec. 125 plan.

ER paid premiums are not included in the EE annual election under the salary reduction arrangement.