Ameriflex ePOP Non-Discrimination Test

This article provides in-depth details about conducting a Non-Discrimination Test, including the questions it will ask, potential reasons for test failure, and information on the necessity of the test.

Written by Taylor Byas

Updated 1 month ago

Selecting the Non-Discrimination Test option from the Action menu will take you to an information page. This page provides information on why non-discrimination testing is necessary, a brief overview of the testing scope, and general definitions (such as Highly Compensated Employee and Key Employee). It also outlines the required information to have on hand when performing the test.

At the bottom of this page, you will find two clickable items:

If you need help please view our Non-Discrimination Testing walkthrough video HERE: Clicking on the HERE text in this line will take you to the Non-Discrimination Test walkthrough video that will explain each of the questions in full detail.
Next: Clicking on this box will begin the test.

What follows is a series of questions designed to help you verify that your Section 125 POP/Cafeteria Plan complies with the IRS regulations. The full test consists of 7 questions, but if you answer Yes to the first 4 questions, you will pass the test at that point.

Note: The majority of employers are unable to answer Yes to question 3 and must, therefore, take the whole test.

The Non-Discrimination Test Questions

Below, you'll find the questions of the Non-Discrimination Tests, along with additional information about the questions and how your answers affect the testing.

Question 1: Can employees enter the plan within 3 years of being hired, and does this apply to all eligible employees? (In other words, once an employee has met the waiting period requirement, are they able to start participating in the pre-tax plan within 3 years.)

If the answer is no, the test will fail
If the answer is yes, proceed to question 2

Question 2: Once an employee has met the employment requirement, is the employee able to enter the plan on or before the first day of the following plan year? (Once an employee exhausts their waiting period for benefits, they should be able to enter the cafeteria plan no later than the first day of the following plan year. For example, if an employer’s plan year begins on 1/1 and an employee is hired on 6/1 with a 60-day waiting period, that employee must be allowed to participate in the cafeteria plan effective no later than 1/1 of the following year.)

If the answer is no, the test will fail
If the answer is yes, proceed to question 3

Question 3: Are all employees eligible for the plan? (This question is asking whether ALL employees of the company, including part-time and/or seasonal employees, are eligible to participate in the Cafeteria plan. If you have any restriction on participation in the pre-tax plan, you must answer No here.)

If the answer is no, proceed to question 3A
If the answer is yes, proceed to question 4

Question 3A: Has the employer established reasonable standards with regard to which employees are eligible to participate in the plan and which are not? (This rule prohibits employers from making arbitrary decisions about who may participate in the plan. On the screen, you will see examples of what is considered reasonable and unreasonable standards for cafeteria plan eligibility. If any of the reasonable standards apply in your situation, then you may answer Yes.)

If the answer is no, the test will fail
If the answer is yes, proceed to question 3B

Question 3B: Please provide the following:

Total number of eligible non-HCEs (this means the total number of all employees who are not highly compensated but who are eligible to participate in the pre-tax benefits, regardless of whether or not they are participating.)
Total number of ALL non-HCEs (the total number of all non-highly compensated employees, including those who are not eligible to participate in the pre-tax benefits)
Total number of eligible HCE’s (this means the total number of all eligible, participating, and non-participating highly compensated employees ONLY)
Total number of ALL HCE’s (the total number of all highly compensated employees including those who are not eligible to participate in the pre-tax benefits)

This data will enable the system to determine whether the benefits are being offered to enough employees for the plan to be considered non-discriminatory. If the ratio leans too heavily toward the Highly Compensated Employee, the test will fail.

Question 4: Do all participants have the same opportunity to select benefits under the plan? (All employees who are eligible to participate in the pre-tax benefits should be able to elect the same benefits. Any pre-tax benefit that is only available to one ‘class’ of employee could be considered discriminatory.)

If this answer is no, the test will fail
If the answer is yes, you will either complete the test or proceed to Question 5 based on the prior answers.

Question 5: Can you answer yes to either of these questions with regard to employer contributions toward major medical insurance coverage (i.e., general health insurance) offered under the plan? (This question is intended to ensure that Highly Compensated Employees are not provided with more of an incentive to participate in a major medical plan than non-highly compensated employees. When calculating the answer to this question, you will need to consider the highest premium among all the major medical plans that a Highly Compensated Employee may participate in. If the employer contributes at least 75% of this amount towards the premiums of all employees, this is considered a ‘safe harbor’, and you can answer Yes to this question. Please note that in saying ‘all employees,’ this does also mean that 75% or more would apply regardless of family-level coverage if such a thing does apply.)

If this answer is no, proceed to Question 5A

If the answer is yes, proceed to Question 6

Question 5A: Are benefits disproportionately enjoyed by HCEs?

This question is intended to ensure that Highly Compensated Employees are not receiving a higher percentage of benefits than non-Highly Compensated employees. For this question, you will need to provide the following information:

Total annual gross compensation for all ELIGIBLE HCEs. (This includes total compensation for the current plan year for all eligible Highly Compensated Employees)
Total annual gross compensation for all ELIGIBLE non-HCEs. (This includes compensation for the current plan year for all eligible non-Highly Compensated Employees)
Total annual cost of the benefits enjoyed under the plan by all PARTICIPATING HCEs. (This includes the total cost of the pre-tax premiums for the current plan year for all eligible Highly Compensated Employees who are participating)
Total annual cost of the benefits enjoyed under the plan by all PARTICIPATING non-Highly Compensated Employees. This includes the total cost of the pre-tax premiums for the current plan year for all eligible non-HCEs that are participating)

The result of this step is calculated by comparing the ratio of premium as divided by salary for HCEs to non-HCEs.

Question 6: Are employer contributions made to participants on a uniform basis without regard to the compensation of participants? (Do all employees receive the same contribution from the employer regardless of their compensation amount or salary?)

If this answer is no, the test will fail

If the answer is yes, proceed to question 7

Question 7: Please provide the following:

Total cost of all benefits for all employees under the plan. (This is the total pre-tax premiums [paid by both the employer AND the employee] for all employees [including Key employees] who are participating in the plan)
Total cost of all benefits for key employees ONLY under the plan. (This is the total pre-tax premiums [paid by both the employer AND the employee] for the Key employees only

Ideally, these figures should be plan year-to-date figures; however, if you prefer, you may use dollar amounts for a period shorter than the entire year (for example, a single month) to facilitate this calculation.

This is the Key employee concentration test. This test compares the pre-tax premiums of key employees to the pre-tax premiums of all employees collectively. If the key employee’s portion exceeds 25% of the group’s pre-tax premiums as a whole, then this portion of the test will not be passed.

Click Submit to proceed to the results screen.

If the test failed, the results display will show the specific questions that have failed. Regardless of the result, a copy of the result screen should be printed for your records to produce as proof in the event of an IRS audit.

Non-Discrimination Test Failure Support

If a failure does occur, it is a good idea first to revisit the test and the particular failed question to ensure that you properly understood the question and, if it is a question that involved entering data, that the information entered was correct and without any spaces/dashes/other characters. A single digit out of place or the inclusion of a non-numerical character can cause an error or a false fail status.

If you understood the questions and entered all data correctly, here are some adjustments you may need to make to your plans to ensure IRS compliance, depending on which question failed.

If Question 3a fails, then this means that the employer needs to extend eligibility to include more non-Highly Compensated Employees.
If Question 5a fails, then this means that less participation on the part of Highly compensated employees is needed. However, highly compensated employees may continue to participate on a post-tax basis. If enough non-Highly Compensated employees participate, Highly Compensated employees may be able to continue participating on a pre-tax basis.
If Question 7 fails, it means that key employees will need to pre-tax fewer benefits to bring this ratio below the 25% threshold. Alternatively, Key Employees may opt to forego participation on a pre-tax basis, allowing remaining employees to participate in the pre-tax plan.

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