HCFSA and DCFSA Discrimination Testing

[Mary C]

If this has been discussed in the past, and a conclusion reached, please give me a link to that discussion.

In the past, we have utilized the same criteria to determine HCE as we used for the 401-K plan, therefore only pulling information once and using it for both tests. Since our plan year runs on a 7/1 to the following 6/30, we are preparing to do the year end testing. However, in the cafeteria plan regs effective 1/1/09, it defines HCE as :

"Any individual or participant who for the preceding plan year (or the current plan year in the case of the first year of employment) had compensation from the employer in excess of the compensation amount specified in section 414(q)(1)(B), and, if elected by the employer, was also in the top-paid group of employees (determined by reference to section 414(q)(3)) for such preceding plan year or for the current plan year in the case of first year of employment)."

Current plan year if the first year of employment is ignored for testing our 401K and pension plan. Is this a change in how the testing for flex spending plans is done?

[J Simmons]

For HCFSA, highly compensated individuals is used rather than 414q HCEs. Highly compensated individuals are the highest paid 25%.

For DCFSA, you do use the 414q definition for HCE in the testing. I think that current plan year compensation for first year participants is something new in the 2007 proposed regs for cafeteria plan testing.

[Guest jackmo]

From page 1676 of the EBIA cafeteria plans manual: "Reminder: Differing Definitions of [highly compensated]. The definitions of "highly compensated individual" and "highly compensated participant" used for purposes of Code section 125 testing are not the same as the definition of "highly conmpensated individual" used for testing a self-insured medical reimbursement plan under Code section 105(h) or the definition of "highly compensated employee" used for testing a DCAP or 401(k) plan."

and

"Caution Regarding Use of Code section 414(q) definition. Under the 2007 proposed regulations, only the Code section 414(q) compensation threshold and optional top-paid group election are used to define who is highly compensated for the Eligibility and C&B Tests. Moreover, the 2007 proposed regulatins also consider the current year's compensation of individuals in their first year of employment when determining who is highly compensated. In contrast, the nondiscrimination tests for DCAPs incorporate the entire Code section 414(q) definition for identifying HCEs, with no modification for individuals in their first year of employment". --same source, pg. 1677.