What is Compliance Testing for FSAs?

Compliance testing (also known as non-discrimination testing) ensures that a company's Medical or Dependent Care FSA treat all employees equally, and do not favor key or highly-compensated employees (HCEs).

Zenefits FSAs are automatically compliant with Section 105 non-discrimination regulations.

However, Zenefits does not administer the following Section 125 compliance tests. Please consult a legal advisor with any questions or concerns regarding these tests.

Medical FSA Sec 125 Compliance Testing

Three tests are used to determine the compliance of a Medical FSA:

  • Eligibility Test: The number of non-HCEs that participate must be at least as much as the number of HCEs.
  • Benefits Test:
    • The required employee contribution must be identical for each benefit level;
    • The maximum benefit level that can be elected cannot vary based on percent of compensation, age or years of service;
    • The same type of benefits (i.e., medical expenses) provided to highly-compensated employees must be provided to all other participants; and
    • Disparate waiting periods may not be imposed.
  • Key Employee Concentration Test: The value of non-taxable benefits selected by Key Employees cannot exceed 25% of the total non-taxable benefits selected by all participants under the plan.

Dependent Care FSA Sec 125 Compliance Testing

In addition to the Eligibility, Benefits, and Key Employee Concentration tests, Dependent Care FSAs must satisfy the following tests:

  • More Than 5% Owners' Concentration Test: requires that more than employees who own more than 5% of the company may not receive more than 25% of the total benefits distributed by the Dependent Care FSA.
  • 55% Average Benefits Test: requires that the average amount of benefits provided to Non-Highly Compensated Employees (NHCEs) must be at least 55% of the average benefits provided to HCEs. All non-HCE and HCE employees, including those who are not participating in the program, are used in this calculation.

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