Cafeteria plan nondiscrimination Issues

[Guest JGreen]

Our firm has a cafeteria plan with the following options:

POP - HCE's, along with their spouses and dependents are fully covered by the employer, thus they do not use this portion of the plan.

MFSA - available to HCE's and NHCE's.

Dep Care FSA - available to HCE's and NHCE's.

Do we need to meet the 25% to Keys on the total, as well as test the DCFSA for the 55%? Is there individual testing for the MFSA? Is the POP okay since no HCE's use it?

JGreen

[SLuskin]

For the Daycare, the 5% or more shareholders cannot have more than 25% of the pretax benefit. If it's an S Corp, more than 2% shareholders cannot participate at all.

[Bob R]

Here's a very brief rundown of the nondiscrimination tests that apply to benefits.

1. There is an overall 25% test (referred to as the concentration test) that applies to all benefits available through the cafeteria plan. It's based on key employees under IRC Section 416 which isn't the same as HCEs. It's not clear, but I wouldn't include the premiums the employer is paying for the HCEs because that's not part of the cafeteria plan. But, you do aggregate the premiums paid by the NHCEs, along with all amounts contributed for dependent care and the health FSA.

2. For dependent care, there are two tests -- the 25% test mentioned by SLuskin in the prior message (this is based only on amounts contributed for dependent care), and, as you pointed out, the 55% average benefits test. The issue with the average benefits test is whether you include those eligible but who don't elect a benefit as a 0%. That brings the percentages for the NHCEs way down -- especially when you have a lot of NHCEs who don't even have dependents. This particular issue is one that is constantly being debated and for which there is no definitive IRS guidance on.

3. For the health FSA, as long as the same maximum is available to everyone, then there is not a discrimination problem. The test is based on availability, not utilization.

Again, this is a brief rundown of the nondiscrimination tests that apply to benefits. You also have to make sure you satisfy the nondiscriminatory eligibility rules. In most plans that's rarely a problem. Providing all of the medical insurance premiums for HCEs only is not a problem due to the repeal of IRC section 89.