Section 125 Testing

The section 125 discrimination rules generally incorporate the nondiscriminatory classification test under code section 410 b that applies to qualified retirement plans.

Section 125 testing. There are nine different tests that can be applicable to benefits provided under a section 125 plan. Section 125 plan nondiscrimination requirements testing early february 11 2018 diane cross some employers are beginning to receive section 125 nondiscrimination testing requests from their third party administrators and for some this is just weeks after the start of the plan year. What is section 125 nondiscrimination testing.

Plans that fail nondiscrimination testing must include gross income for highly compensated participants the amounts that would have been nontaxable if the plan had passed. Any amount over 5 000 should be included in boxes 1 3 and 5 as wages social security wages and medicare wages. However this test is modified by substituting highly compensated individuals and highly compensated participants for highly compensated employees.

If a plan fails to pass non discrimination testing highly compensated employees lose the tax favored benefits of participating in the plan that is they must include the benefits or compensation in their income. Simply click on the test s that pertain to your plan to learn more. This test is often performed after these programs pass 105 h testing.

If you also offer health flexible spending account fsa or dependent care fsa benefits there are additional tests to complete. This saves both the employer and the employee money on income taxes and social security taxes. The irs requires non discrimination testing for employers who offer plans governed by section 125.

Section 125 testing must be performed on self insured benefit programs that are paid on a pre tax basis as a component of the cafeteria plan. The total dependent care benefits the employer paid to the employee or incurred on the employee s behalf including amounts from a section 125 plan should be reported in box 10 of form w 2. This means any plans that allow employees to contribute pre tax income into a benefits account such as a flexible spending account fsa.

In other words the tax free treatment of benefits provided under the plan is lost and highly compensated participants will have imputed income equal to the salary. Your plan allows employees to pay for their health care and dependent care expenses on a pre tax basis. As noted above some tests are related to eligibility and availabilityof benefits and other tests are based on actual benefits elected utilization.