3. Key points Nondiscrimination Testing IRS Requirements
What is included in our testing services
Common worksheet errors
Testing failure reasons
Outside factors that impact testing results

4. Nondiscrimination Testing IRS Requirements
Mandated testing for each plan year
BESTflex plans have 9 required tests
Test and results may be requested at audit
Fees associated with failure to test
Failure of a test results in taxation penalties

5. What is included in our testing services
All 9 tests
Worksheet and workbook materials
Phone or assistance
Education on how to correct failures
Testing result notification
Record-keeping of results and tests
Guidance to prevent failures

6. What is included in our testing services
For each type of benefit, various testing is performed
Health Care FSA (Section 105)
Eligibility Test *
Benefits Test
Dependent Care FSA (Section 129)
Eligibility Test
Contributions and Benefits Test
55% Average Test *
25% Owner Concentration Test
Cafeteria Plan (Section 125)
Contributions and Benefits Test *
25% Concentration Test (key employee test) *
* Most common tests that fail

7. Common worksheet errors
Many fail letters sent due to inaccurate data
Cafeteria Plan components incorrect
Officer listed as incorrect individual
Compensation listed as W-2 wages
Compensation reports wrong period
Employees inactive during plan year listed
Eligibility listed incorrectly
Employee list limited

8. Common worksheet errors
Cafeteria Plan components incorrect
Appears self-employed individual is participating
Utilization of highly-compensated appears larger or smaller than actual
Officer
Number of officers appears larger
Safe Harbor tests pass in error

9. Common worksheet errors
Compensation reports W-2 wages
Employee classified as non-highly compensated in error
Inability to list employees from highest-paid to lowest-paid
Compensation reports wrong period
Employee classified as highly compensated in error

10. Common worksheet errors
Employees not active during plan year listed
Overall employee count increases
Total compensation increases
Utilization of plan appears lower
Eligibility listed incorrectly
Tests completed or skipped in error
Total compensation reported inaccurately
Ratios appear more or less balanced

11. Common worksheet errors
Employee list limited
Only eligible employees listed
Eligibility testing results not accurate
Employees identified as non-highly compensated in error
Utilization percentages inaccurate
Terminated employees not listed
Related Employer employees not listed

12. Testing failure reasons
Health Care FSA (Section 105)
Eligibility Test *
Reasons
Health Care FSA participation top-heavy
Includes top 25% by pay regardless of compensation or authority as “highly compensated”
Options to avoid failure
Increase participation among lower-paid
Decrease participation among higher-paid
Limit eligibility to only full-time employees
Offer an employer contribution for all eligible employees into a Health Care FSA
*Most common tests that fail

13. Testing failure reasons
Health Care FSA (Section 105)
Benefits Test
Reasons
Waiting period discrepancies
Different maximum for groups of employees
Options to avoid failure
Same waiting period for all eligible
Same maximum election for all eligible

14. Testing failure reasons
Dependent Care FSA (Section 129)
Eligibility Test
Reasons
Too many ineligible employees
Options to avoid failure
Hire less seasonal or part-time employees
Expand eligibility
Contributions and Benefits Test
Offering onsite daycare to some employees only
Different maximums for groups of employees
Offer same benefits to all eligible employees

15. Testing failure reasons
Dependent Care FSA (Section 129)
55% Average Test *
Reasons
Very small percentage of employees are owners or highly compensated individuals and one of them participates
Not many non-highly compensated individuals elect Dependent Care FSA
Options to avoid failure
Owners and highly compensated individuals do not participate
Owners’ and highly compensated individuals’ maximums are reduced based on preliminary test findings
Constant monitoring in case of election changes
Constant monitoring in case of new hires
Can only modify by reducing election during plan year
*Most common tests that fail

16. Testing failure reasons
Dependent Care FSA (Section 129)
25% Owner Concentration Test
Reasons
More than 5% owners participate in Dependent Care FSA
Not many employees elect Dependent Care FSA
Options to avoid failure
More than 5% owners do not participate
More than 5% owners’ combined maximum is limited to 33% of all other employees’ total Dependent Care FSA dollars elected
Constant monitoring in case of election changes
Can only modify by reducing election during plan year

17. Testing failure reasons
Cafeteria Plan (Section 125)
Eligibility Test
Reasons
Too many ineligible employees
Options to avoid failure
Hire less seasonal or part-time employees
Expand eligibility

18. Testing failure reasons
Cafeteria Plan (Section 125)
Contributions and Benefits Test *
Safe Harbor pass if company pays 75% or more of every health plan premium for every eligible employee
Reasons for failure
Owner, officer, and highly compensated individuals comprising large percentage of the pre-tax insurance premiums
Owner and/or officer participates in pre-tax insurance premiums and the disparity in compensation is not great
Options to avoid failure
Increase participation in pre-tax insurance premiums
Avoid 100% employer-paid single insurance plans
Increase owner and/or officer compensation
Owner and/or officer pay share of insurance premiums post-tax
Decrease eligibility of employees
*Most common tests that fail

19. Testing failure reasons
Cafeteria Plan (Section 125)
25% Concentration Test (key employee test)*
Reasons for failure
Key Employees participate to a more than 25% extent in total Cafeteria Plan benefit plans
Not many employees have pre-tax insurance or FSA elections
Options to avoid failure
Key Employees pay portion of insurance premiums post-tax
Avoid 100% employer-paid single insurance plans
*Most common tests that fail

20. Outside factors that impact testing results
Large changes in number of employees
Implementing a HDHP
Changing plan year
Employees’ children aging out of Dependent Care
Economy

21. Outside factors that impact testing results
Large changes in number of employees
Mass layoffs
Lowers participation among non-highly compensated employees
Section 105 Eligibility Test at risk
Mass hiring
New employees are ineligible: Section 129 and 125 Eligibility Tests at risk
New employees are eligible and do not elect Health Care FSA: Section 105 Eligibility Test at risk

22. Outside factors that impact testing results
Implementing a HDHP
Section 105 Eligibility Test risks
Higher interest among lower-paid individuals
Alleviates most interest in Health Care FSA due to HSA interaction
Limited Health Care FSA not as appealing
Section 125 Contributions & Benefits Test risks
Pre-tax HSA contribution inequality
Maximum allowable restricted based on family structure

23. Outside factors that impact testing results
Changing plan year
Involves running a short plan year
May decrease interest for non-highly compensated
Highly compensated may continue to elect causing failures
Employees’ children aging out of Dependent Care
Highly compensated individual continues to elect
Non-highly compensated individuals drop

24. Outside factors that impact testing results
Economy
Employees feel need to save
Employee becomes ineligible for Dependent Care elections due to spouse not employed
Employees’ spouses’ employer implements HDHP
Premium rate increases
Greater percentage of compensation in Section 125 Contributions & Benefits Test
Employees change from family to single coverage

25. Summary of key points Annual plan testing required
Testing services included in annual renewal fee
Accurate and complete worksheet needed for accurate results
Complexity of tests and various definitions of highly compensated make pass/fail predictions difficult
Even preliminary testing is not a guarantee
Main ways to avoid failure
Reasonable eligibility standards
Higher Health Care FSA participation (employer contribution)
No Highly Compensated Individual participation in Dependent Care FSA
Have all employees pay a portion of premiums pre-tax
Unavoidable outside factors can cause failure

26. Questions?
Any questions can be addressed by or phone at your convenience Compliance Department
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