Nondiscrimination testing

I apologize if this seems like a basic question, but since I'm far from expert in these cafeteria plans, I frequently question myself.

I've run across a block of plans, where eligibility for the cafeteria plan is identical to the eligibility for the health plans. There has been no eligibility testing on the cafeteria plans, because the TPA says that since eligibility is the same for all participants, they automatically pass.

I would not have said this was true, depending upon the eligibility requirements for the health insurance. For example, first plan I looked at (which raised this question) provides that anyone working less than 30 hours per week is not eligible for the health insurance. Consequently, they are not eligible for the cafeteria plan.

Well, all 4 HCE/Keys are naturally eligible for the health insurance, but many employees are <30 hours per week and therefore ineligible. Isn't this a potential problem? Or am I missing something obvious?

Now, I understand that they might very possibly pass if testing is done, but it doesn't seem like it is automatic.

Thanks!

You are correct.  Part-time employees cannot be excluded from the cafeteria plan nondiscrimination  eligibility tests, even if they are not eligible for the underlying benefits.  It's one of many testing issues that would benefit from IRS clarification.

Do not apologize, there is a good possibility that you are correct.  There are many variables that can make this discussion, on this forum, very difficult.  To begin with the rules/testing can be complex, there are safe harbors, and group size considerations.

There are 3 parts to the Section 125 Discrimination testing; Eligibility, Benefits & Contributions, and  Key Employee Concentration.  The eligibility test looks at whether a sufficient number of non-highly compensated individuals are eligible to participate in the cafeteria plan. If too many non-highly compensated individuals are ineligible to participate, the plan will fail this discrimination test.  The key phrase here is “if too many non-highly compensated individuals are ineligible to participate”.

I have 2 suggestions, first is await a response from Chazm, he is very knowledgeable about this.  These other is familiarize yourself with the testing requirements.  One of the questions you should ask these groups is for a copy of their non-discrimination testing results.  If they do not have one there is a good chance they are at risk.

6 minutes ago, Chaz said:

You are correct.  Part-time employees cannot be excluded from the cafeteria plan nondiscrimination  eligibility tests, even if they are not eligible for the underlying benefits.  It's one of many testing issues that would benefit from IRS clarification.

Your post popped up as I was posting my reply, see my suggestion above about you replying to my post. Do you agree with my suggestions?

Thank you both. I don't have the hard numbers at my fingertips, but let's assume the plan would pass both the "3 years of service" test and the "entry date" requirement test. (Entry and eligibility are immediate if you are hired to work 30 hours per week.) However, if you have 40 NHC's, and only 4 of them are 30+ hours per week, and all 4 Highly Compensated Individuals participate, then there is no way you will pass even the unsafe harbor percentage of the facts and circumstances test, correct? As I said, there has been NO prior testing on eligibility. 

Now, since the plan doesn't have 3-year eligibility, it appears that the plan could be tested on a disaggregated basis - one plan benefiting employees with less than 3 years of service, and one plan benefiting employees with 3 or more years of service, correct? And therefore, if NO HC in the "less than 3 year" category then the disaggregated plan for the "less than 3 years" would automatically pass, and you'd then just have to pass for the "more than 3 year" plan? Similar to the "Otherwise Excludable Employee" rule in 401(k) plans...

Also, am I correct that "years of service" has no minimum numbers of hours - just elapsed time?

I'm not even yet getting to the C&B test - just trying to wrap my head around this first part, and what I think is a potential problem, although actual testing, if performed, may be fine.

Thanks so much for your assistance!

Do you believe that temporary seasonal employees need to be included in the Cafeteria testing?