POP and FSA Non-Discrimination Testing
If you have a Flexible Spending Account (FSA) or a Premium Only Plan (POP), the IRS requires you to submit to non-discrimination testing once a year.The reason for nondiscrimination testing is to prevent highly compensated employees from taking advantage of the benefits that these plans provide for employers and employees alike. Such advantages, consist of an increase in take home pay because the dollars spent are pre-tax and a 7.65% savings annually on employers matching FICA tax.
Nondiscrimination testing is a big factor in way of compliance. If employers do not adequately follow all the steps necessary for nondiscrimination testing, or they fall out of compliance with federally mandated regulations while using these plans, all discriminatory benefits are included in the gross pay of highly compensated employees. This also means that employers can no longer take advantage of the 7.65% tax break on their annual employer matching FICA tax. In other words, if an employer fails to comply with IRS regulations and testing procedures, any and all benefits that were received from that employer’s FSA or POP plan must be re-paid.
Overall, the greatest concern when filing nondiscrimination testing is that your company is in compliance with all regulations before you begin. As stated above, the initial reason for nondiscrimination testing is to avoid the abuse of these benefits by highly compensated employees.