If you offer any pre-tax employee benefits, you need to have a Section 125 (also known as a POP or Cafeteria Plan) in place. These benefits may include your medical, dental, vision, life, disability, voluntary benefits, FSA, HRA, or more.
After your plan year ends each year,* you need to complete non-discrimination testing for your POP benefits.** The testing is designed to confirm your plan doesn’t provide excess benefits to executives.
Testing should be completed by a qualified outside party; if you need suggestions, we can provide options. Many vendors require you to have a benefit with them prior to testing. Each vendor uses a different template, so if you change vendors, don’t be afraid to ask clarifying questions.
There is no reporting requirement for this testing, but if the IRS audits your plans and you haven’t completed and passed the testing and made necessary corrections, fines will be imposed. Make sure you record and file the results of your test, as well as any adjustments or corrections.
If you aren’t sure whether your benefits will pass a non-discrimination test or think the plan may be on the border, you can have testing completed throughout the year. If you do fail a non-discrimination test, be sure to take corrective action and document, document, document! Less is best does not apply to compliance!
In this event, the excess benefits are taxable to the employee (preferably this should be done in the same plan year) via W2. When there is more than one impacted employee, the excess tax should be done in proportion to their deductions.
As with a 401k, some POPs may have a safe harbor exception, but this cannot be used when there is an HSA involved.
We recommend:
1) Reaching out to us for vendor options
2) Asking the vendor clarifying questions regarding the testing
3) Reviewing & saving your test results
- a) If you do fail testing, speaking to an ERISA attorney with any questions
- b) Looping back with us if you need to make benefits changes or have additional questions after testing.
*Your plan year is based on the plan year for your POP document which is often, but not always, aligned with your medical renewal. Take a look at your plan document to confirm your plan year. If you don’t have a POP, our benefits team can connect you with vendor options.
**Your 401k is probably a standalone benefit that requires its own non-discrimination testing completed by a TPA (third-party administrator). If it is standalone, it should not be included in your POP non-discrimination testing.