Non-Discrimination Testing (NDT)

What is Non-Discrimination Testing (NDT)?

Flexible Spending Account Compliance (NDT) testing is a set of annual tests mandated by the IRS which are meant to ensure that Health FSA and Dependent Care FSA plans offered by employers do not disproportionately benefit a privileged set of participants, such as owners or highly compensated individuals. Companies who use Rippling’s FSA product can use its platform to calculate their current compliance test results and make adjustments to employee benefits.

When Should I Run the Test?

You can run NDT any time throughout the year. We recommend running the test as soon as possible so that if the company fails, you can re-run the test immediately. Testing typically occurs during the end of the third quarter of the plan year because the IRS requires that these tests pass as of the last month of the plan year, so running the test before the third quarter gives you enough time to make any necessary adjustments. The setup in Rippling is very easy to use, so there is no reason to run the test as early as possible.

Do I need to Run the Test?

The IRS can audit any employer on their FSA compliance, so this test applies to any company that offers an FSA plan. Running NDT will assist all employers to ensure that their FSA and Dependent care FSA plans are compliant.

Am I Ready to Start Testing?

Yes! You are ready to run testing now; however, please be prepared to classify employees (link to the employee classification section). Classifying your employees will allow the system to run testing accurately, as the testing will test for compliance based on which class an employee belongs to. For example, if your company did not use Rippling in the previous year then you will want to obtain the previous years’ compensations so that employees can be properly classified. You will also need to have company ownership information (which employees own certain percentages of the company).

How to Set Up

Step 1: Set up the FSA app in Rippling

If you do not already have the Flexible Spending Account app installed in Rippling, you can install the app by searching for the Flexible Spending Account app under Company Apps:

Please see our Help Center article here for admins setting up FSA for the first time: https://help.rippling.com/fsa/setting-up-fsas/what-is-an-fsa-account-and-what-can-i-spend-it-on/

Step 2: Set up Employee Classifications

Go to the FSA app → Compliance Tab → ‘Employee Classification’:

Select the “Employee Classification” Tab as shown in the image above. This will allow you to toggle “Yes” or “No” for each of the classifications described. Rippling assists in assigning highly compensated employees based on compensation date, however it is the company’s responsibility to accurately classify and confirm employee’s information. 

The IRS defines a highly compensated employee as the following:

Is More Than 5% Owner: An employee who owns more than 5% of the business, or a spouse or dependent of such an owner.

Is a Highly Compensated Employee for FSA: An employee who is in one or more of the following criteria:

  • Five highest-paid officers
  • Owns more than 10% of the company
  • Highest-paid 25% of employees

Is a Highly Compensated Employee for Dependent Care FSA: An employee whose compensation during the preceding plan year was above an IRS-specified threshold or was a More-than-5% owner. Plans in 2020 utilize the $125,000 threshold for 2019.

If all employees at your company own more that 5% of the company and/or the majority of the team earns more than $125,000, the Dependent Care FSA may not be the best benefit for your company.

Step 3: Set up Exclusions

How to set Exclusions for the FSA Compliance Tests:

  • Health FSA Eligibility Test
  • DCA Eligibility Test 
  • More-Than 5% Owners Concentration Test 
  • 55% Average Benefits Test

Select the “Exclusions” Tab as shown in the image below. This will allow you to toggle “Excluded” or “Not Excluded” for each of the compliance tests. If any employee is marked as “Excluded”, they will not count towards that tests compliance calculation.

How To Run the Tests

Health Eligibility Test

Who Should be Included and Excluded in the Health Eligibility test?

Employees who should be included in the Health Eligibility test:

  • Employees of the sponsored plan and any other business that is a member of a related group of corporations
  • Employee eligible at any time during the year but terminated prior to year-end should be counted

Employees who can be excluded from the Health Eligibility test:

Only if the following were not offered the plan when they started their employment or at renewal, can they be excluded. 

  • Employees who are less than 21 yrs old
  • Employees who have less than a year of service
  • Collectively bargained employees

Click here to set these classifications and exclusions.

How does Rippling Calculate the Health Eligibility Test?

  1. This Eligibility test is a ratio percentage which evaluates the participating Non Highly Compensated Employees to the percentage of participating Highly Compensated Employees. 
  2. We then use a non Highly Compensated Individuals (HCIs) concentration percentage to determine Safe Harbor percentage. 
  3. If the ratio percentage is above the Safe Harbor percentage, then this test will pass. If the ratio percentage is below its Safe Harbor, the plan will fail.

Dependent Care FSA Eligibility Test

Who Should be Included and Excluded in the Dependent Care Eligibility test?

Employees who are included in the Dependent Care FSA test are:

  • Employees of the sponsored plan and any other business that is a member of a related group of corporations
  • Employee eligible at any time during the year but terminated prior to year-end should be counted

Employees who should be excluded from the Dependent Care FSA test are:

  • Employees who are less than 21 yrs old
  • Employees with less than a year of service [only if they weren’t eligible]
  • Collectively bargained employees

Click here to set these classifications and exclusions.

How does Rippling Calculate the Dependent Care FSA test?

  1. The Dependent Care Eligibility test is a ratio percentage which evaluates the number of Non Highly Compensated Employees who are eligible to the number of non-Highly Compensated Employees who are eligible.
  2. We then use a non Highly Compensated Individuals (HCIs) concentration percentage to determine Safe Harbor percentage
  3. If the ratio percentage is above the Safe Harbor percentage, then this test will pass. If the ratio percentage is below it’s Safe Harbor, the plan will fail.

More-than-5% Owner Concentration Test

Who Should be Included and Excluded in the More-Than 5% Owner test?

Employees who should be included in the More-Than 5% Owner test:

  • Any employee who fits the definition of more than 5% owner and has contributed funds  during the plan year, including those for terminated employees

Employees who should be excluded from the More-Than 5% Owner test:

Only if the following were not offered the plan when they started their employment or at renewal, can they be excluded. 

  • Employees who are less than 21 yrs old
  • Employees who have less than a year of service
  • Collectively bargained employees

Click here to set these classifications and exclusions.

How does Rippling Calculate the More-Than 5% Owner  test?

The More-Than-5% Owner Concentration test ensures that the company’s total contributions towards Dependent Care FSA do not favor owners. 

  1. Owners contributions cannot exceed more than 25% of the plan’s participants’ total contributions, otherwise the test will fail.

For example, in the image shown below, the “Total DCA Contributions by more than 5% owners” ($0) should not exceed more than 25% of the “Total DCA Contributions” ($5300).  In this example, the company will pass the More-Than-5% Owner test.

55% Average Benefits Test

Who Should be Included and Excluded from the 55% Average Benefits test?

Employees who should be included in the 55% Average benefits test:

  • All employees who do not meet the exclusions below
  • Terminated employees from mid-plan year are included

Employees who should be excluded from the 55% Average benefits test:

Only if the following were not offered the plan when they started their employment or at renewal, can they be excluded. 

  • Employees with compensation less than $25,000
  • Employees age less than 21
  • Employees who haven’t completed a year of service
  • Employees with collective bargaining agreements

Click here to set these classifications and exclusions.

How does Rippling Calculate the 55% Average Benefits test?

The 55% Average Benefits Test is an average utilization test. It focuses on making sure there isn’t a significant difference between the average Dependent Care FSA contribution of a Highly Compensated Employee and a Non Highly Compensated Employee. 

  1. The ratio of the average contribution of a Non-Highly Compensated Employee to the average contribution of a Highly Compensated Employee must be 55% or greater in order to pass the test.

For example, in the image below, you can see that the average contributions by non- HCEs ($220.83) is 55% or greater than the average contribution of HCEs ($0). In this example, this group will pass the 55% average benefits test.

If I fail, what can I do?

The key is to pass the test on the last day of the plan year. Here are a few things you can consider to get back on track.  Please note that we recommend for administrators to seek legal guidance on these options. Rippling simply helps provide the tools to help you understand where you land.

Tip* Try running tests with enough time before the plan year ends. Typically during the end of the third quarter would be a great time to run the tests as it gives enough time to remediate. 

  • HCEs can stop making contributions moving forward and let non-HCEs keep contributing. 
  • Changes can be made mid-plan year for the purpose of trying to make the plan pass non-discrimination testing. These changes CANNOT be made after the plan year has been completed.
  • If you fail, you can categorize the amount as taxable income the second to last day of the plan.

If I fail the Health FSA Eligibility Test

You can improve your chances of passing the Health FSA Eligibility Test by Editing the Eligibility of your employees.

You can make additional non-HCEs eligible for the FSA plan by selecting the “Make Eligible” box next to the employee’s name. Or you can fund accounts of non-HCEs by updating the “Updated Annual Contribution” column. 

Please note changes will be effective on the first of the next month. (Employees will not be notified of this change via email. BenefitsAdministrators and HR managers are responsible for letting the employees know directly.)

If I fail the Dependent Care Eligibility Test

You can improve your chances of passing the Dependent Care Eligibility Test by selecting the “Edit Eligibility” button.

You can make additional non-HCEs eligible for the Dependent Care FSA plan by selecting the “Make Eligible” box for certain employees.

Once you make an employee eligible, they will have a 30 window to enroll in the plan. Any changes will be effective on the first of the next month. (Employees will not be notified of this change via email. BenefitsAdministrators and HR managers are responsible for letting the employees know directly.)

If I fail the More-Than 5% Owner Test

You can improve your chances of passing the More-Than 5% Owner test by selecting the “Edit Contribution” button.

You can reduce the contributions of More-Than-5% owners by updating an employee’s  “Projected Annual Contribution” or pausing future contributions to the owner’s Dependent Care accounts. More-Than-5% Owner’s can also make their contributions post-tax in effort to pass. Any changes will be effective on the first of the next month. (Employees will not be notified of this change via email. Benefits Administrators and HR managers are responsible for letting the employees know directly.)

If I fail the Average 55% benefits Test

You can improve your chances of passing the Average 55% benefits test by selecting the “Edit Contribution” button.

You can reduce the contributions of Highly Compensated Employees by:

  1. Reducing the contributions of HCE by updating the Projected Annual Income
  2. Pausing future contributions to the HCE’s Dependent Care FSA
  3. Funding accounts of non-Highly Compensated Employees by updating the “Projected Annual Contribution”

Any changes will be effective on the first of the next month. (Employees will not be notified of this change via email. Benefits Administrators and HR managers are responsible for letting the employees know directly.)

Failing a non-discrimination test can cause employers and employees to lose the benefits that Flexible Spending accounts provide. If you are worried that your company will not pass, please work with your legal team for further guidance. The IRS may audit employers and request test results. If results are not produced, the IRS could inflict tax penalties on the company and participants.

 

Safe Harbor Percentage Table