Non-Discrimination Testing in Section 125 POP Plans

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Non-Discrimination Testing in Section 125 POP Plans

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With some help, setting up and keeping a Section 125 plan can be quite simple and trouble-free. The business need only comply with a number of documentary rules, and it can easily be done with the help of well-informed service providers who can offer packaged POP Plan documents. An important requirement that needs to be complied with is nondiscrimination testing.

Nondiscrimination Testing – What Is It?

The provisions of tax code are very clear on this: a Section 125 POP offered must not show any discrimination to be granted a tax-favored status. According to the Internal Revenue Code, the plan should not discriminate in favor of “highly-compensated employees” (HCEs) and “key employees” as to eligibility, contributions, and benefits. Compliance with this rule is monitored via the nondiscrimination test.

But first, who is considered an HCE and a key employee in 2014?

Any officer, shareholder who owns over 5% of voting stock, an employee with an annual gross income of more than $115,000, and their respective spouses and dependents is said to be a highly compensated employee.

A key employee on the other hand, is defined to be an officer with annual gross compensation of over $130,000, an owner holding more than 5% of the company, an owner holding 1% of the company, and receiving an annual income of above $150,000.

Nondiscrimination Testing: The Tests

A POP Section 125 Plan must pass tests to be deemed non-discriminatory. These are:

1. Eligibility Test – the plan should not inhibit the participation of non HCEs to favor HCEs and key employees.
2. Contributions and Benefits or Utilization Test – requires that for all participants of the plan, waiting periods, minimum employee contributions, and maximum benefit levels should be the same. Passing the Utilization Test requires the plan first to pass these tests: Key Employee Concentration Test, and Owner’s Test.

The above bits of information are only a few of the important things that a company should know about the nondiscrimination requirements of a POP Plan Section 125.