Understanding Section 125 POP Plan Nondiscrimination Testing

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Implementing a POP Plan Section 125 in an organization can be very beneficial for the employer and the company employees.
The tax savings that can be realized by both parties can go a long way towards augmenting workers' net income as well as providing additional funds for the company's other business needs.
With the some guidance, setting up and maintaining a Section 125 plan can be quite simple and trouble-free.
The employer need only comply with a number of documentary requirements, and he can easily do this with the help of knowledgeable service providers who can offer packaged POP Plan documents.
An important requirement that needs to be complied with is the 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 to this rule is monitored via the nondiscrimination test.
But first, who is considered an HCE and a key employee? Any officer, shareholder who owns over 5% of voting stock, employee with an annual gross income of more than $110, 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 an 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 participation of non HCEs to favor HCEs and key employees.
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 pass these three tests: Key Employee Concentration Test, Dependent Care Spending Account Test, and Owner's Test.
The above bits of information are only a few of the important things that a company should know about non discrimination requirements of a POP Plan Section 125.
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