Both Cafeteria Plans (FSA/DCAP/POP) and HRA must meet certain non-discrimination requirements set forth by the IRS. The idea behind the testing is to ensure the Plan isn’t top heavy, meaning the Plan needs to provide more tax favored benefits to non-highly compensated employees. In order to perform the non-discrimination tests, information about the Company’s shareholders, officers, and highly- compensated employees is needed and depending on which test is being performed will depend on what information is needed.
The NDT can usually be lumped into 3 categories: Eligibility, Availability, Utilization.
NDT looks to ensure a that owners, key employees and other highly compensated employees do not receive more of the benefit than the average, non-highly compensated employee.
To maintain compliance with IRS rules, regulations and tax favored status, it is vital that nondiscrimination testing is preformed and passed.
A Highly Compensated Employee is:
- An Officer;
- A shareholder owning more than 5% of the voting power or value of all classes of stock of the employer;
- Highly compensated, defined by Code 414(q) to mean an employee who earns in excess of the dollar threshold in the prior plan year ($120,000 for 2018), or, if elected by the employer, who was in the 20% top-paid group; or
- A spouse or dependent (within the meaning of Code 152) of an individual described above.
A Key Employee is defined in Code 416(I) as any employee who, during the plan year was:
- An officer that earned more than $160,000 in 2018 (as indexed). Compensation should be based upon amounts actually paid during the plan year and should not be annualized for new hires or partial year employees. However, no more than 50 employees (or if lesser, the greater of 10% or three employees) are considered officers; or
- A more-than 5% owner of the employer;
- A more-than 1% owner of the employer with annual compensation in excess of $160,000.
Please note that 2% or greater shareholders in a Sub S Corp and partners in a Partnership generally CANNOT participate in a Section 125 FSA/POP/DCAP Plan or as Section 105 HRA Plan by IRS rule.
For more details on what NDT needs to preformed on your plan, please call us!
Under ERISA, the Plan Administrator must report specified plan information to the DOL each Plan Year using Form 5500. This obligation applies to each ERISA applicable plan and employer sponsors, which is why it is so important to address the number of plans maintained. Form 5500 is due seven months after a Plan Year ends and failure to file on time can result in an $2,083 per day fine.
ERISA also imposes a specific recordkeeping rule tied to this requirement. Plan administrators that file Form 5500 must also provide a Summary Annual Report (SAR) to participants covered under the plan and to others receiving SPDs. An SAR simply summarizes key information found on Form 5500. The SAR for any given year must generally be furnished within nine months of the close of the plan year. If the time to file the Form 5500 is extended, the SAR may be furnished within two months of the end of the extension period. A SAR must be furnished even in the year a plan is terminated.
Small plans are exempt from filing Form 5500 for any year in which they satisfy certain conditions. To be a small plan, a plan must have fewer than 100 covered participants at the beginning of the Plan Year in question. For this purpose, only participants (employees or former employees) actually covered under the Plan are counted. This would include COBRA qualified beneficiaries and retirees covered under a retiree plan, but would not include covered spouses or other dependents. Individuals who are eligible but not enrolled are also excluded. Under the regulations, this complete Form 5500 exemption is available to: (1) small unfunded plans (benefits paid from the employer’s general assets); (2) small insured plans (benefits paid through policies of insurance other than stop-loss insurance); and (3) small combination plans (benefits paid through a combination of general assets and insurance).
Plans exempt from filing Form 5500 are therefore also exempt from the SAR requirement. In addition, under the DOL’s SAR regulations, a totally unfunded welfare plan, regardless of size, need not provide SARs.
Need help? Call us!