Discrimination testing for 125 plans

[Guest Ray Goetz]

What practical experiences are people having on the various "discrimination" tests that are required for cafeteria plans under Section 125 of the Internal Revenue Code?

-- Is the testing generally done by the employer or by a service provider?

-- Is testing actually being performed at all?

-- Is there still very little (any?) IRS enforcement in this area?

-- Any experiences in the not-for-profit area (such as dealing with related entities that arguably should be viewed as one)?

[Lisa Hand]

Ray: I can only give you input as it relates to my company. We are plan service providers. We perform all required testing on EVERY client with a Section 125 Plan. Regardless of how often the IRS is auditing these plans, it is required for the plan to be in compliance. By the way, the IRS issued audit guidelines for Section 125 Plans last year, so the assumption would be they are looking at this type of plan.

[Guest Shelia]

We haven't performed many discrimination tests for Section 125 Plans. However, a client recently came to us and asked if we would performs these tests. This client has three Section 125 Plans, two Premium Only Plans, and one with FSA's and Dependent Care.

I am aware of the various tests, but I have two questions.

Do you have to aggregate all three plan together when performing the Concentration Test, or do test each separately? and;

If the Concentration Test is failed, how do you determine who must report the additional income? Is it the key employees with the highest non-taxable benefits? Since I have several key employees could I use the leveling method and start by reduce all to a certain level and reducing further, as needed, until the test is passed?

Any responses would be appreciated, as we are just entering the Section 125 Plan administration field.

Thanks