Title: Benefits Nondiscrimination Testing
Source: https://ethosbenefits.com/services/nondiscrimination-testing
Publisher: Ethos Benefits
Summary: Ethos Benefits runs Section 125, dependent care and Section 105(h) nondiscrimination testing so your plans keep their tax advantages for every employee.

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# 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.

[Request a Strategic Analysis](https://ethosbenefits.com/strategic-analysis)

## 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.

1.  **Section 125 cafeteria plan tests** Eligibility, contributions and benefits, and the key employee concentration test.
2.  **Dependent care assistance tests** The eligibility, benefits and 55% average benefits tests for dependent care accounts.
3.  **Section 105(h) testing** The eligibility and benefits tests for self-funded medical reimbursement plans.
4.  **Results explained** What each result means, who is affected, and what it would cost if the test fails.
5.  **Corrections** Design 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™](https://ethosbenefits.com/fiduciary-framework) · [How fiduciary governance works](https://ethosbenefits.com/services/fiduciary-governance)

## Related reading.

-   [**Section 105(h) nondiscrimination testing** Benefits 101: How Section 105(h) testing works for self-insured health plans, HRAs and health FSAs, who counts as highly compensated, and what happens if a plan fails.](https://ethosbenefits.com/benefits-101/section-105h-nondiscrimination-testing)
-   [**The ERISA compliance checklist** Benefits 101: An ERISA compliance checklist for employer health and welfare plans, with each document, notice and filing, who it applies to, and when it is due.](https://ethosbenefits.com/benefits-101/erisa-compliance-checklist)

[Browse everything in Learn](https://ethosbenefits.com/learn)

## Sources

1.  [26 U.S. Code § 125, cafeteria plans](https://www.law.cornell.edu/uscode/text/26/125), Legal Information Institute, Cornell Law School
2.  [26 U.S. Code § 105, including § 105(h)](https://www.law.cornell.edu/uscode/text/26/105), Legal Information Institute, Cornell Law School
3.  [26 U.S. Code § 129, dependent care assistance programs](https://www.law.cornell.edu/uscode/text/26/129), 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.

## Keep reading Related to this page.

-   [**Compliance** Ethos Benefits keeps your health and welfare plans compliant with ERISA, the ACA, COBRA, HIPAA, mental health parity and the CAA, with every item proven. _Read more_](https://ethosbenefits.com/services/compliance)
-   [**ACA compliance and reporting** Ethos Benefits keeps your company ACA compliant: employer mandate, affordability, SBCs and PCORI fees, plus Forms 1094-C and 1095-C as an added service. _Read more_](https://ethosbenefits.com/services/aca-compliance)
-   [**ERISA compliance** Ethos Benefits keeps your health and welfare plans ERISA compliant: plan documents, SPDs, required disclosures, Form 5500, bonding and provider disclosures. _Read more_](https://ethosbenefits.com/services/erisa-compliance)
-   [**Mental health parity** Ethos Benefits coordinates your plan’s NQTL comparative analysis under the Mental Health Parity and Addiction Equity Act and keeps it current. _Read more_](https://ethosbenefits.com/services/mental-health-parity)

## 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](https://ethosbenefits.com/strategic-analysis) [Call (407) 803-4710](tel:+14078034710)