Nondiscrimination testing. Section 125, 105(h) and dependent care.

Your cafeteria plan, dependent care account and self-funded medical plan keep their tax advantages only if they don't favor highly compensated or key employees. As an added service, Ethos Benefits runs the Section 125, dependent care and Section 105(h) nondiscrimination tests, explains any failure and helps you correct it before the plan year ends.

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What you get.

A failed test usually means the highest-paid employees lose part of their tax benefit. Testing early in the year leaves time to fix the design before it counts.

Section 125 cafeteria plan testsEligibility, contributions and benefits, and the key employee concentration test.
Dependent care assistance testsThe eligibility, benefits and 55% average benefits tests for dependent care accounts.
Section 105(h) testingThe eligibility and benefits tests for self-funded medical reimbursement plans.
Results explainedWhat each result means, who is affected, and what it would cost if the test fails.
CorrectionsDesign or contribution changes that bring a plan back into compliance before the end of the plan year.

Which tests apply.

Test	Applies to	What it checks
Section 125 eligibility	Cafeteria plans	That eligibility doesn’t favor highly compensated employees
Section 125 contributions and benefits	Cafeteria plans	That benefits and contributions don’t favor highly compensated participants
Key employee concentration	Cafeteria plans	That key employees receive no more than 25% of the plan’s tax-free benefits
Dependent care (Section 129)	Dependent care accounts	Eligibility, benefits, and the 55% average benefits test
Section 105(h)	Self-funded medical plans	That eligibility and benefits don’t favor highly compensated individuals

Fixing a failure.

When a test fails early in the year, the fix is usually a change to eligibility or contribution limits. When it fails at year end, the fix is usually reporting the lost tax benefit as income. Testing early is what keeps the choice in your hands.

Part of your Fiduciary Framework™.

Every Ethos service reports to your benefits committee. The work is reviewed at your quarterly committee meeting, each decision is recorded with the reasoning behind it, and the record lives in your Ethos Fiduciary OS. That is what lets your committee show the plan was run prudently.

See the Fiduciary Framework™ · How fiduciary governance works

Sources

26 U.S. Code § 125, cafeteria plans, Legal Information Institute, Cornell Law School
26 U.S. Code § 105, including § 105(h), Legal Information Institute, Cornell Law School
26 U.S. Code § 129, dependent care assistance programs, Legal Information Institute, Cornell Law School

Questions employers ask about this.

When should nondiscrimination testing be done?

Early in the plan year, so there is time to correct a problem, and again near the end of the year using actual data.

What happens if a plan fails?

Usually the affected highly compensated or key employees lose some or all of the tax advantage on their benefits, and that amount becomes taxable income to them.

Does Section 105(h) apply to fully insured plans?

No. Section 105(h) applies to self-insured medical reimbursement plans, which includes most self-funded health plans.

See what your plan is really costing you.

A Strategic Analysis starts with your plan documents and your broker agreement, then shows you what your plan costs, where the risk sits, and what a committee would decide with the full picture.

Request a Strategic Analysis Call (407) 803-4710