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What are the Nondiscrimination Rules?
Section 125 of the Internal Revenue Code allows employees to pay their share of qualified expenses with tax-free income. Self-employed individuals, partners, owners of Sub-Chapter S and their spouses and dependents may not participate, although they can benefit in an indirect sense from reduced FICA and FUTA taxes resulting from the participation of their employees.

Section 125 introduces two sets of nondiscrimination rules, in addition to the rules that govern the underlying benefits. One set of rules applies to Highly Compensated Employees and the other applies to Key Employees.

Highly Compensated Employees are officers, 5% (or greater) shareholders, and other highly compensated employees based on facts and circumstances. Spouses and dependents of these individuals are also considered Highly Compensated for the purposes of these rules. Simply stated, the Section 125 plan's eligibility requirements may not discriminate in favor of the Highly Compensated Employees. If all employees are not treated the same, the differences must be based on a reasonable classification. The plan is also prohibited from discriminating in favor of Highly Compensated Employees with regard to benefits and contributions. Only collective bargaining units should be treated differently from all other employees, and then only as a result of such bargaining.

The other set of rules relates to Key Employees. Section 125 provides that 5% (or greater) owners, 1% owners with compensation exceeding $150,000 annually, and certain other highly paid officers and owners may not receive more than 25% of the total benefits received by employees or more than 45% of Dependent Care Assistance benefits (if any).

The Section 125 Plan should be "tested" every year after open enrollment or whenever there is a change in participation which could cause the plan to become discriminatory.

How does the Nondiscrimination Testing Module work?

The Module explains the rules and asks simple questions. The answers to these questions are used to evaluate compliance with the rules. If your plan passes the tests, you will be able to print the test results and retain them as evidence that your plan complied with the nondiscrimination rules. If there is a problem, you will receive an error message and guidance on ways to correct the problem.

Tests should be performed immediately after each open enrollment period and any time participation changes in a manner that could affect the results of the test.

What is the cost?

Access to the Nondiscrimination Testing Module from BenefitsWorkshop is only $100 per year.

How do I sign up?

To subscribe to BenefitsWorkshop's Nondiscrimination Testing Module, click the "Continue" button and follow the instructions. If you still have questions, please check the Frequently Asked Questions (FAQs) below.

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