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Non-discrimination testing for FSAs

Non-discrimination testing is a way to make sure your benefits don’t favor highly compensated or key employees. Or in other words, your benefits don’t discriminate against certain employees. When you offer a Health FSA or Dependent Care FSA with Gusto we complete non-discrimination testing for your company.

There are several tests that make up non-discrimination testing, though we commonly use two: the key employee concentration test and the average benefits test.

There is another test called the more-than-5%-owner concentration test, but we would only need to complete this test if there were employer contributions to a company’s Dependent Care FSA – something Gusto doesn’t currently support.

Timing of non-discrimination testing for FSAs

Companies must be in compliance with non-discrimination testing at the end of their policy year. We run this test for you at three times during your policy year:

  1. Open Enrollment

    • We run the test right after open enrollment ends. Based on your employees’ salaries, ownership info, and their plan elections, we can determine if your group is likely to pass testing at the end of your plan year. If your group is unlikely to past testing at the end of the plan year we will assist you with making changes.

  2. Pre-Renewal

    • We run the test again 2-3 months prior to your renewal so we can see again, closer to the end of the plan year, if your group is likely to pass testing at the end of the plan year. We will help you take action if you are deemed unlikely to pass. We will also advise you on the elections for the following year to ensure you are likely to pass at the beginning of your new policy year.

  3. End of Policy Year

    • We run this test again at the end of your policy year. You must pass non-discrimination testing here or you risk having to perform benefit reversals, which essentially is treating your Key or Highly Compensated Employees’ pre-tax benefits as post-tax, retroactively. This means having to pay out the taxes for these benefits after they’ve already been deducted on a pre-tax basis. We perform reversals in order to keep you compliant and in the case of an audit.