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  • Nondiscrimination Testing

    Questions and Answers

    This article outlines commonly asked questions about nondiscrimination testing.

    What is nondiscrimination testing?

    Nondiscrimination testing is an Internal Revenue Service (IRS) requirement for employers who offer cafeteria plans (for example, Premium Only Plan (POP), Flexible Spending Account (FSA)) and/or a Health Reimbursement Arrangement (HRA). Testing is designed to prevent plans from discriminating in favor of highly compensated and/or key employees. In most cases, highly compensated and key employees can participate, but they cannot benefit more than other employees. Testing looks at eligibility, benefits, and utilization, among many other areas. 

    Each plan year, PacificSource Administrators (PSA) sends our clients an email notification as a reminder to perform testing. Clients may choose to have PSA assist them with their testing by requesting the testing documents, which must be completed and returned to PSA. If a client does not request documents, or they do not return the documents to PSA, we assume the client is having their plan tested through other avenues (for example, their tax advisor). 

      Is there a charge for testing?

      PSA offers one free test each plan year. Clients are welcome to request a retest at any time during a plan year. However, a fee will be charged for retesting. Fees vary by employer size and plans offered. Fee information is available upon request from our testing team. 

        Can we seek outside advice?

        Yes. Because PSA does not provide tax or legal advice, you would need to seek this advice from your tax advisor. If PSA performs the testing, we will need a completed General Information Sheet and worksheet in Excel format. The testing documents we provide will collect data for all employees, and not only those who actively enrolled. The results are based on the information provided in the documents. PSA will not alter or make changes to the data provided to perform the testing. 

        When are the testing documents due?

        There is not a due date for returning the testing materials. However, the IRS recommends testing early in the plan year to detect any potential discrimination issues. If a plan is found to be discriminatory, modifications can then be made before the end of the plan year. Changes to employee elections after year-end are not allowed per IRS regulation. So if a plan fails the test after the plan year has ended, a client will be referred to their tax advisor.

        When will testing results be ready?

        Our goal is to return the testing results by email within 90 business days after receiving a completed worksheet. However, worksheets are processed in the order they are received, including those that have been revised, and the turnaround time may be longer during our peak season in January.

        What if a plan fails testing?

        If a plan fails testing, our PSA Testing Team will send an email asking the client to contact us to discuss the results and the steps necessary to correct them (for example, possible data errors, applicable safe harbors).

        Examples of possible issues:

        • Anytime different classes of employees are treated differently.
        • Excluding part-time, seasonal, or temporary employees, especially when the majority of employees are part-time, seasonal, or temporary.
        • Varying employment requirements, waiting periods, or entry dates for different classes of employees.
        • Delayed entry into the plan beyond the first day of the first plan year beginning after the date the employment requirement is met.
        • Basing employer contributions or benefits on age, years of service, or level of compensation.
        • Ineligible participants. With certain business entities, allowing employee owners to participate when they are ineligible to participate. Only employees are eligible to participate. This means more-than-2% owners in an S corporation or LLCs taxed as an S corporation (including their spouse, children, parents, and grandparents) and self-employed individuals are not eligible to participate. Self-employed individuals include sole proprietors, partners in a partnership or LLC taxed as a partnership, general partners, and certain limited partners in a limited partnership or LLP. 
        • Only key or highly compensated employees are participating. 

        Questions?

        You're always welcome to contact us!

        PacificSource Administrators
        110 International Way
        Springfield, OR 97477

        Sales and Service: PSAsales@pacificsource.com  
        Flex Benefits: PSAcustomerservice@pacificsource.com
        COBRA Benefits: COBRA@pacificsource.com
        PSA Testing Team: (541) 246-1462 or psatestingteam@pacificsource.com

        (541) 485-7488 or toll-free (800) 422-7038  
        Fax (541) 485-8759 or toll-free (800) 575-1109 

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