Implementing a Section 125 of the POP Plan in an organization can be very beneficial for the employer and the employees of the company. The tax savings that both parties can achieve can go a long way toward increasing workers' net income, as well as providing additional funds for other business needs of the company.
With some guidance, setting up and maintaining a Section 125 plan can be fairly simple and hassle-free. The employer only needs to meet a number of documentary requirements, and can easily do so with the help of expert service providers who can offer packaged POP Plan documents. An important requirement that must be met is the non-discrimination test. There are many sites like CXC Solutions where you can get information regarding non-discrimination testing.
A Section 125 POP offered must not show any discrimination in order to be granted tax privilege status. According to the Internal Revenue Code, the plan must not discriminate in favor of "highly paid employees" (HCE) and "key employees" in terms of eligibility, contributions and benefits. Compliance with this rule is controlled by the non-discrimination test.
Non-discrimination tests: the tests
A Section 125 POP Plan must pass the tests to be considered nondiscriminatory. These are:
1. Proof of Eligibility – Plan must not inhibit non-HCE participation to favor HCEs and key employees.
2. Contributions and Benefits or Proof of Utilization – Requires waiting periods, minimum employee contributions, and maximum benefit levels to be the same for all plan participants. Passing the Utilization Test requires the plan to first pass these three tests: Key Employee Concentration Test, Dependent Care Spending Account Test, and Owner Test.