Maximizing Compliance with PBS Nondiscrimination Testing Services

Non-Discrimination Testing (NDT) is a crucial aspect of employee benefit plans that ensures fairness and compliance within the workplace. NDT is specifically required for certain types of benefit plans, such as Flexible Spending Accounts (FSA), Premium Only Plans (POP), and Section 105(h) plans.

The primary purpose of NDT is to prevent discrimination among employees regarding the benefits offered by these plans. Without NDT, there is a risk of favoring highly compensated employees over non-highly compensated employees, which can lead to significant legal complications and unfair practices.

Why do we need Discrimination Testing for FSA, and compliance with HCE regulationsPOP?

Non-Discrimination Testing (NDT) is an essential requirement for companies to prevent key and highly compensated employees from benefiting disproportionately. The purpose of NDT is to ensure that benefit plans offered by employers, such as flexible spending accounts (FSA) and premium-only plans (POP), comply with legal requirements under the Internal Revenue Service (IRS) regulations.

Under IRS regulations, FSA and POP plans must satisfy non-discrimination rules to maintain their tax-advantaged status. Non-discrimination testing helps to prevent these plans from favoring highly compensated employees over other employees, thus leveling the playing field and ensuring fairness in benefit distribution.

What Are the Specific Tests Conducted for the FSA & POP Nondiscrimination Test?

Non-discrimination testing is a crucial aspect of employee benefit plans, particularly for flexible spending accounts (FSA) and premium-only plans (POP). Key components of non-discrimination testing include defining key terms, outlining specific tests conducted, and describing different types of testing.

Key terms such as highly compensated employees (HCE) and key employees need to be clearly defined. An HCE is an employee who meets certain income or ownership thresholds set by the Internal Revenue Service (IRS). Key employees, on the other hand, are individuals who hold significant positions within the organization and have the potential to influence plan decisions.

There are 9 different tests. Some are related to eligibility and availability of benefits, and others are based on actual benefits elected (utilized).

  • The Section 125 Cafeteria Plan
    • Eligibility Test for HCE and non-key employees
    • Contributions and Benefits Test
    • Key Employee Concentration Test (utilization)
  • Health FSAs
    • Eligibility Test for HCE and non-key employees
    • Benefits Test
  • Dependent Care FSA (DCAP) and ADP Test Compliance
    • Eligibility Test
    • Contributions and Benefits Test
    • More-Than-5% Owners Concentration Test (utilization and compliance)
    • 55% Average Benefits Test (utilization)

These key components of non-discrimination testing are essential in maintaining fairness and compliance with regulations for employee benefit plans. By conducting these tests, employers can ensure that their plans do not favor highly compensated or key individuals, providing equal opportunities for all eligible employees.

Why conduct the 105(h) Eligibility and Benefits Nondiscrimination Testing?

Benefits under an employer-sponsored health plan generally are not taxable, however, in order to ensure that employers do not improperly discriminate in favor of Highly Compensated Individuals (HCIs), Congress created nondiscrimination rules under code section 105(h). This test is designed to verify two things: First, that “enough” non-HCIs profit under the health plan. Second, to verify that the health plan’s benefits do not favor HCIs and HCEs, ensuring compliance through ADP testing.

Types of 105(h) Testing

Two tests—the eligibility test and the benefits test — need to be satisfied in order to pass the 105(h) testing.

Eligibility Test: This test focuses on whether there are enough non-HCIs to “benefit” from the health plan. The term “benefit” generally means the employee is actually enrolled in the plan, not just eligible to enroll, ensuring equitable participation across both HCEs and non-key employees

The Eligibility Test includes:

  • 70% Test – is satisfied if the benefit plan benefits 70% or more of all employees during the plan year.
  • 70%/80% Test – the employer must first verify that 70 % or more of all employees are “eligible” to benefit under the plan. If so, the plan must actually benefit 80% or more of all those eligible employees.
  • Nondiscriminatory Classification Test – is passed if, based on certain “facts and circumstances,” the plan does not discriminate in favor of HCI eligibility.

Benefits Test: this test is generally passed if the same benefits are provided to both HCIs and non-HCIs. This test would generally be violated if an employer offered better eligibility terms for HCIs than non-HCIs. It would also be violated if benefits increase with years of service or compensation.

Testing Process and Timeline

Non-discrimination testing should be performed at least annually, typically at the end of the plan year or after any significant plan changes. The testing process involves gathering relevant data, analyzing plan participation, and comparing it against IRS non-discrimination requirements. Employers can undertake this process internally or engage third-party administrators for expertise and compliance assurance.

Timeliness is crucial in NDT. Employers need to stay ahead of deadlines to ensure ample time for corrections and adjustments. Proactive testing can help avoid the rush and potential oversights that can occur with last-minute evaluations.

Preparing for Non-Discrimination Testing

Preparation is key to successfully navigating Non-Discrimination Testing. Employers should start by gathering accurate employee and plan data, including salaries, employee classifications, and details about plan participation. It’s essential to ensure that records are up-to-date and comprehensive, as these details form the basis of the NDT. Employers can also benefit from reviewing plan designs to identify any aspects that might inadvertently favor highly compensated employees or key employees, making adjustments as necessary to improve inclusivity and compliance.

Strategies for improvement involve proactive plan management, such as offering additional education to lower-paid employees to encourage participation or adjusting plan features to be more inclusive. Regular reviews of the plan’s structure and participation rates can help identify potential issues before they result in test failures. Employers might also consider engaging with a third-party administrator or legal advisor specializing in employee benefits to conduct mock tests, providing valuable insights and corrective measures.

Understanding the tests themselves is crucial. The Eligibility Test, for example, assesses whether a sufficient percentage of non-highly compensated employees are eligible for the plan, while the Benefits Test examines whether the benefits provided under the plan are uniformly available to all employees. By familiarizing themselves with the criteria of these tests, employers can better anticipate potential issues and address them proactively.

Impact of Failing Non-Discrimination Testing

The Immediate consequences of failing NDT can be significant for both employers and employees. Employers may face penalties and are required to take corrective action to address the failure, which can include making taxable reimbursements to highly compensated employees for benefits received in excess of what is allowed under nondiscrimination rules.

Long-term implications can extend beyond financial penalties. Repeated failures can lead to reputational damage, affecting an employer’s ability to attract and retain talent. For employees, mainly highly compensated ones, failure can result in unexpected tax liabilities, diminishing the value of their benefits package.

Corrective measures involve both immediate actions to remedy the failure and longer-term plan adjustments to prevent future occurrences. This might include refunding excess contributions to highly compensated employees, revising the plan’s eligibility criteria, or increasing efforts to boost participation among non-highly compensated employees. It’s essential for employers to work closely with legal advisors or benefits consultants to ensure that corrective actions are effective and compliant with IRS guidelines.

FAQs about Non-Discrimination Testing

What if my plan fails NDT?

If a plan fails NDT, the employer must take immediate corrective action to address the imbalance. This may involve adjusting benefits, reimbursing excess contributions to highly compensated employees, or making plan design changes to enhance inclusivity.

How often should NDT be conducted?

NDT should be conducted annually, typically at the end of the plan year, or whenever significant changes to the plan or employee demographics occur that could affect the test outcomes.

Can small businesses be exempt from NDT?

While small businesses with fewer than 20 employees might not be subject to some federal requirements for benefits testing, they may still need to comply with state laws or consider NDT to ensure fairness and prepare for future growth.

How We Can Help

At PBS, we specialize in guiding employers through the complexities of Non-Discrimination Testing. Our team of experts can help you prepare for and conduct NDT, ensuring your benefit plans remain compliant while serving the needs of all your employees. From plan design consulting to conducting the tests and advising on corrective actions, we offer comprehensive support tailored to your specific needs.

Recognizing the dynamic nature of workplace benefits and the ever-evolving legal landscape, our approach focuses not just on compliance, but on enhancing the value and effectiveness of your current plan. Partnering with PBS means gaining a dedicated ally committed to the long-term success of your benefits strategy, ensuring it is robust, compliant, and aligned with your organizational goals. Let us help you navigate the intricacies of Non-Discrimination Testing, so you can continue to provide a competitive, equitable benefits package that meets the needs of your diverse workforce.

Ready to Ensure Compliance and Optimize Your Benefits Plan? Contact PBS Today

Don’t let the complexities of Non-Discrimination Testing put your benefits plans at risk. By focusing on the specifics of your current plan, PBS can provide expert services that streamline the testing process, ensure compliance, and optimize your benefits plans for all your employees.

Contact PBS today to discover how we can tailor our approach to meet the unique needs of your organization. Schedule your consultation now and take the first step towards hassle-free Non-Discrimination Testing, safeguarding the value and integrity of your benefits offerings.