- Section 125 Nondiscrimination Testing Suite
- Dependent Care Tests
This test is used to determine if HCEs are receiving too much benefit from the Dependent Care (DCAP) benefit.
The Eligibility Test is designed to ensure that a minimum percentage of non-HCE’s are eligible to participate in the plan and that benefits are available to them on a nondiscriminatory basis.
This test is used to determine if owners are receiving too much benefit from the Dependent Care benefit.
Dependent Care Tests
The Eligibility Test is designed to ensure that a minimum percentage of non-HCE’s are eligible to participate in the plan and that benefits are available to them on a nondiscriminatory basis. While the statue is not explicit, it should be reasonable to apply this Eligibility Test based on who is eligible to participate in the DCAP (regardless of whether they actually elect to participate).
There are two requirements to the Dependent Care Eligibility Test. First, that the plan benefits employees who qualify under a reasonable classification established by the employer (the classification must be based on objective business criteria that identify the category of employees who benefit. Second, the classification(s) must be nondiscriminatory under a safe harbor percentage test. This will be discussed in more detail below.
Subtest #1: Reasonable Classification
A reasonable classification is established by the employer if and only if, based on all the facts and circumstances , the classification is reasonable and is established under “objective business criteria” that identify the category of employees who benefit under the plan. Examples of “objective business criteria” are as follows:
- Type of job (e.g. mechanics, management, etc.)
- Geographic location
The reasonable classification component of the Nondiscriminatory Classification Test requires objective business criteria, and is considered to be a subjective test. If the eligibility classifications under the Plan do not fall under one of the above mentioned objective business criteria you should consult with your legal or tax advisor.
Subtest #2: The Classification Must Be Nondiscriminatory
A reasonable classification is nondiscriminatory for a plan year if, and only if, the group of employees included in the classification benefiting under the plan either satisfies a “Safe Harbor Percentage Test” or an “Unsafe Harbor Percentage Test.”
2. Dependent Care Contributions & Benefits Test
This test is used to determine if non-HCEs are benefiting from the plan in the same way as HCEs. This is a subjective test. As long as the benefit maximum is the same for all employees the plan will pass this test.
If plan satisfies these conditions then the plan passes the Benefits Test.
This test is used to determine if owners are receiving too much benefit from the Dependent Care benefit. As long as more-than-5% owners are receiving less than 25% of the total DCAP benefits then the plan will pass this test.
This test is used to determine if HCEs are receiving too much benefit from the Dependent Care (DCAP) benefit. If the average DCAP benefit for the non-HCE group is at least 55% of the average DCAP benefit for the HCE group then the plan will pass this test. The 55% average is the average for all employees, not just the employees who are participating in the dependent care benefit.
If you have any questions about the tests, please contact our Service Center by calling (855) 269-7878, or email us at FSAServiceTeam@sentinelgroup.com.