Strange discrimination testing question

[Guest CKrum]

In a Section 125 plan the full amount of a participants insurance premium, both employee and employer paid, must be included as part of the total benefit when performing discrimination testing. If an employee decides to opt-out of the plan, as is their right (though not very smart), their deduction for insurance premium must then be done on an after-tax basis and would not be included in the discrimination testing. What about the employer paid portion? Can it continue to be paid by the employer and non-taxable to the employee? Would it still need to be included in any testing of the 125 plan?

The reason I'm asking is I have an employer with several Highly-Compensated and Key employees. The insurance premiums assoiated withe these employees is causing the 25% Concentration and the Contribution and Benefits tests to fail. If they could opt-out of the premium part of the plan and pay the taxes on their portion of the premium (which is relatively small) the tests would pass with flying color.

Creating a seperate plan for just the pop would still fail the safe-harbor test so I'm not sure that would help.

[LRDG]

The employer subsidy toward cost of insurance is not included in non-discriminaion testing, only the employee portion and amount in the salary reduction agreement is considered when testing Sec. 125.