If you offer a Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA), the IRS requires you to perform non-discrimination testing on these plans. The reason is simple: To ensure that there isn’t discrimination between highly compensated employees (HCEs)/key employees and other employees at a company. Maintaining employee benefits compliance means fairly offering your benefits across all levels of employees.
Non-discrimination testing takes on even greater importance during the COVID-19 pandemic, as your workforce and the way your employees engage with their benefits may have changed during these times. We’ve outlined two reasons why non-discrimination testing is even more important right now and what you can do about ensuring your FSA and HRA are compliant.
Changing employee population
The number of Americans who have filed for unemployment benefits since the start of the pandemic has eclipsed 40 million (roughly 1 in 4 American employees). The decision to furlough or lay off employees can affect your employee population numbers. And, as a result, that can affect the compliance of your employee benefits.
Mid-year election changes
IRS Notice 2020-29 states that employers may temporarily allow employees to newly make, change or revoke a Medical FSA or Dependent Care FSA election in the middle of the plan year. Prior to this Notice, the employee needed to experience an IRS-approved qualifying event in order to make mid-year changes. Notice 2020-29 temporarily waives that requirement for the calendar year 2020. These mid-year changes affect your FSA election data, which can impact your FSA’s compliance.
What can you do?
We have previously recommended that you test your plans at least twice per plan year (once at the beginning or middle of the plan year and again prior to the end of the plan year). However, with employee population and regulation changes, you may decide that you would like to test more than twice in the plan year to ensure compliance throughout the year. That’s why many employers turn to a subscription-based non-discrimination testing platform so they can test as often as they’d like.
The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own counsel.