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Section 125 POP Plans are Required to Perform Non Discrimination Testing Each Year

June 3rd, 2011 • 0 Comments • Posted by admin

If you read the IRS regulations on Section 125 POP Plans, also known as cafeteria plans, one thing becomes clear:  the IRS wants all employees to have equal access to the plan and its benefits.  That’s why the regulations include nondiscrimination rules and require regular testing of the plan.

Nondiscrimination rules are intended to discourage employers from offering more, better, or exclusive access to cafeteria plan benefits to company bigwigs.  Specifically, the rules target “highly compensated” and “key” employees.  The IRS classifies an employee as “highly compensated” if he is an officer; a shareholder who owns more than 5% of the stock in the company; someone who is highly compensated “based on the facts and circumstances”; or a spouse or dependent of that person.

Meanwhile, an employee is “key” if he gets annual pay over $160,000; owns 5% or more of the business; or owns 1% and gets annual pay over $150,000.  Your plan is considered to favor key employees if you offer more than 25% of the nontaxable benefits you provide through your plan go to those employees.  (Important exception:  if your plan is offered pursuant to a collective bargaining agreement, it is not considered to favor key employees.)

If your plan favors either highly compensated or key employees, you lose the tax-advantaged status of your plan.  As you can imagine, this could result in some substantial increases in your employees’ taxable wages – and payroll taxes for you.

Annual testing for nondiscrimination is required for employers who offer Section 125 Plans.  Should your plan fail these tests, you could lose the tax-advantaged status of your plan.  This would be a significant blow to your company and your employee.  These are tests you don’t want to fail!

Nondiscrimination Testing Is Easier Than You Think

The rules for nondiscrimination testing are quite complicated, but TaxFreePremiums can take the work out of it.  We offer easy to use non-discrimination software that is included in the low annual fee of $99 that makes testing easy.  You won’t have to task your busy employees with having to research IRS rules, or take a chance that they’ll get it wrong, because our experts stay up to date with all of the latest rules, and pass this knowledge on to you.  We also help you create and maintain IRS-compliant plan documents, provide a step-by-step checklist of employer responsibilities and provide all the tools, documents, and software so you’ll be in compliance.

Why worry about compliance when TaxFreePremiums makes it easy and cost-effective?  Don’t risk losing your cafeteria plan’s tax advantages.  Contact us today!


 

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