Nondiscrimination testing requires accurate employee classifications, a complete census, and benefit amounts that match the supporting records. Missing employees or incorrect payroll data can change the result.
Before year-end, confirm which tests apply, reconcile the data, and review outstanding results. For calendar-year arrangements, an October review gives employers time to investigate problems and determine whether corrective action is available.
Applying the Wrong Nondiscrimination Tests
Cafeteria plan testing under Section 125 and dependent care assistance testing under Section 129 address different requirements. Passing one test does not mean you’ve met every applicable requirement.
Confirm the benefit arrangements, testing period, employee population, and tests included in the review. Identify related businesses so the provider can determine whether their employees must be considered together.
Ask whether an exception or safe harbor applies and what supports that conclusion. Qualifying simple cafeteria plans receive special treatment, but a small workforce alone does not establish eligibility.
BC²’s cafeteria plan and dependent care testing services include reviewing results and recommending next steps.
Leaving Employees Out of the Testing Census
An enrollment list may not include everyone needed for testing. Employees who declined a benefit can still matter when evaluating eligibility and other requirements.
Use the provider’s census template and let the provider apply permitted exclusions. Do not remove part-time employees, employees who left during the year, or nonparticipants solely because they have no current deduction.
Compare the census with HR and payroll records for the requested period. Check for:
- Missing hires and terminations
- Duplicate records
- Transfers between related companies
- Employees omitted during a payroll conversion
- Missing eligibility or participation dates
A July payroll conversion, for example, can leave earlier compensation and terminated employees in the old system. Exporting only from the new system may produce an incomplete testing file.
Misclassifying Highly Compensated and Key Employees
Highly compensated and key employee classifications depend on the applicable test. A management title or current salary alone does not determine the category.
Provide the requested compensation, ownership, officer, and family relationship information. Confirm which compensation definition and measurement period the provider needs. Do not reuse last year’s classifications without checking for changes.
Disclose ownership transactions and related entities. Separate payroll accounts do not establish that businesses can be tested separately.
If a classification changes during the review, document the reason and confirm whether the test must be rerun.
Submitting Benefit Amounts That Do Not Match Payroll
Annual elections, actual deductions, employer contributions, and reimbursements are different figures. Confirm which amount belongs in each field before submitting the data.
Reconcile the testing file with payroll and benefit records. Investigate:
- Elections that were never implemented in payroll
- Omitted employer contributions
- Duplicated deductions
- Missing adjustments or reversals
- Amounts assigned to the wrong benefit
- Actual totals mixed with projections
Label projected year-end amounts and record how they were calculated. Keep them separate from completed payroll totals.
Correct the source of a discrepancy before updating the testing file. An unexplained spreadsheet adjustment can hide a payroll or enrollment error.
Assuming Equal Benefit Offers Mean a Passing Test
Offering everyone the same election opportunity does not satisfy every nondiscrimination requirement. Some tests examine benefit amounts as well as eligibility and plan terms.
The Section 129 dependent care average benefits test generally requires average benefits for employees who are not highly compensated to equal at least 55 percent of the average benefits for highly compensated employees. Applicable exclusions and calculation rules also matter. The Section 129 dependent care testing requirements establish this requirement alongside other conditions.
Different election patterns can therefore affect the outcome even when employees receive the same maximum election opportunity.
Ask the provider to explain the groups and amounts used in the calculation. Comparing two employees’ deductions does not establish whether the plan passes.
Testing Against Outdated Plan Documents
Provide the documents and amendments effective during the period being tested. Identify changes to eligibility, contribution formulas, employee groups, or available elections.
If written terms and payroll practices differ, explain both to the provider. Changing a testing spreadsheet does not resolve the underlying discrepancy.
For a premium-only plan, confirm that the written document reflects the applicable terms. BC² provides premium-only plan document services. Preparing that document does not replace the applicable testing review.
If the comparison reveals broader documentation or reporting gaps, review the related benefits compliance problems to address before year end.
Treating Preliminary Testing as the Final Result
Preliminary nondiscrimination testing can flag problems before year-end. Its results depend on the data and projections supplied.
Later payroll activity, corrected classifications, or updated benefit information can change the outcome. Confirm what additional information is needed for final testing or confirmation and who will provide it.
Set the schedule around the arrangement’s applicable testing period. October is a preparation opportunity, not a universal deadline. Noncalendar arrangements require a schedule that fits their own year.
Leaving Failed Nondiscrimination Tests Unresolved
First determine whether a failed or unexpected result comes from incorrect data. Correct verified errors and have the provider rerun the affected tests.
If the data is accurate, establish what the failure means and which responses are permitted. Depending on the test, affected highly compensated or key employees may lose favorable tax treatment. The consequences do not automatically apply to every employee.
Do not change elections, reduce deductions, or issue refunds without confirming the permitted approach with the appropriate advisers. A response that works for one arrangement may not apply to another.
Get answers to these questions:
- Which test failed and why?
- What action is permitted, and by when?
- Does payroll or tax reporting need to change?
- Who will complete the action?
- What follow-up testing or documentation is required?
Retain the original report, supporting explanations, and revised results. Assign responsibility for each action and record its completion.
Prepare the Records for Nondiscrimination Testing
Gather these records before the agreed submission date:
– Plan documents and amendments: Include the terms effective during the testing period.
– Employee census: Include the full requested employee population and relevant dates.
– Compensation records: Confirm the required compensation definition and measurement period.
– Ownership and related business information: Report ownership details and changes during the relevant period.
– Elections and contributions: Reconcile amounts with supporting records and clearly label projections.
– Prior testing reports: Include unresolved issues and actions already taken.
Use the provider’s current template and approved method for transmitting employee information. Assign one person to coordinate the submission, and have HR, payroll, and business owners verify their records before sending the file.
Nondiscrimination Testing FAQs
Does last year’s passing result cover this year?
No. The prior result applies to the period and information tested. Changes in employees, compensation, ownership, elections, or contributions can affect this year’s analysis.
Should the testing census include employees who declined benefits?
Follow the provider’s instructions. Nonparticipants may be relevant to the tests. An enrollment-only file may exclude required employees.
Do all employers need the same nondiscrimination tests?
No. The arrangements offered and applicable rules determine the tests, including whether an exception or safe harbor applies.
Can every failed test be corrected before year end?
No. Available actions depend on the arrangement, reason for failure, timing, and applicable rules. An earlier review provides time to respond but does not guarantee a correction or eliminate tax consequences.
Request Nondiscrimination Testing From BC²
Need testing completed or help understanding a result? BC² provides cafeteria plan and dependent care nondiscrimination testing, reviews results, and recommends next steps.
Tell BC² which arrangements need testing, the applicable year, and whether you already have a report. If records are missing, identify the gaps when you inquire. You can request assistance before the data package is complete.
Request a nondiscrimination testing proposal to confirm the scope, required information, and timing for your review.
