DCAP and non-discrimination

[wsp]

Company is a partnership. Currently offers Section 125 plan for medical premiums to be paid pre-tax. Company also offers a stand alone Section 129 DCAP plan. Previously only NHCE's participated in the plan. However, recently an HCE had a child HCE does not own 5% of company and is not considered a Key employee but is considered an HCE. Given that no current NHCE's are participating, I would imagine that it's impossible for the HCE to utilize this benefit....am I correct? If that's the case is the only real solution to gross up said HCE's compensation to account for the tax implications?

[Jacmo]

You are correct--impossible for HCE to utilize. They would automatically fail the 55% test. Solution is to remove the HCE from the plan, and add all DCAP deductions back to W-2 as taxable income. (Be sure that prior payroll records are cleared out correctly--DCAP deductions go into a separate box on the W-2 and you don't want that showing up at W-2 time.)