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Cafeteria plans, also referred to as “125 Plans” allow employers to offer benefits to employees on a tax-favored basis. For employees to use pre-tax dollars to pay for benefits through a cafeteria plan (such as health coverage and FSA reimbursements), the IRS requires that the plan follow certain rules. One of those rules is that the plan must be nondiscriminatory. To determine if a plan is nondiscriminatory, the plan must conduct nondiscrimination testing.
The purpose of Section 125 nondiscrimination testing is to ensure that cafeteria plans do not favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). In other words, it aims to prevent discrimination in favor of top earners when it comes to accessing and benefiting from the available tax-advantaged benefits offered through the cafeteria plan.
To comply with Section 125 nondiscrimination rules, employers must conduct various tests and calculations to demonstrate that the benefits offered under the cafeteria plan are made available on a nondiscriminatory basis to all eligible employees. These tests assess factors including plan participation rates, contributions, and benefits received by HCEs compared to NHCEs.
If an employer's cafeteria plan fails nondiscrimination testing, it can result in adverse tax consequences for the employer and participating employees. Consequences could include the disqualification of the entire plan, tax penalties, or adjustments to certain employees’ contributions to rectify the discrimination.
Employers often seek the assistance of benefits administrators or legal experts with expertise in employee benefit plans to ensure compliance with Section 125 nondiscrimination testing requirements and avoid potential penalties.
BAS can help your plan with its compliance obligations by performing required nondiscrimination testing.
Here are the tests BAS offers:
- Cafeteria Plans(Section 125)
- Health FSA (Section 105(h))
- Dependent Care (Section 129)
- Adoption Assistance (Section 137)
- HRA (Section 105(h))
- Self-Insured (Section 105(h))
- Group Term Life (Section 79)
- Educational Assistance (Section 127)
Nondiscrimination Testing is a critical aspect benefit plan compliance, and it doesn't have to be a headache. Let us help you with testing, so you can keep your benefit plans compliant. Learn more about our Nondiscrimination Testing Services here.
Benefit Allocation Systems (BAS) provides best-in-class, online solutions for: Employee Benefits Enrollment; COBRA; Flexible Spending Accounts (FSAs); Health Reimbursement Accounts (HRAs); Leave of Absence Premium Billing (LOA); Affordable Care Act Record Keeping, Compliance & IRS Reporting (ACA); Group Insurance Premium Billing; Property & Casualty Premium Billing; and Payroll Integration.
MyEnroll360 can Integrate with any insurance carrier for enrollment eligibility management (e.g., Blue Cross, Blue Shield, Aetna, United Health Care, Kaiser, CIGNA and many others), and integrate with any payroll system for enrollment deduction management (e.g., Workday, ADP, Paylocity, PayCor, UKG, and many others).
