A Section 125 “Key”
employee is quite analogous to Company officer. To determine if the Section 125 cafeteria plan meets the 25 percent concentration
test, the PARTICIPATING employee should be marked as “Key” in the employee record if:
1) He is an officer that makes more than $170,000 per year or,
2) He is
more than a 5% owner or,
3) He makes more than $150,000 per year and is more than a 1% owner
Note that several “limits” on the number of “key” employees in any company apply, and an employee
may be considered “Key” if he is simply related to an owner, even if he/she does not personally meet the ownership
criteria. (Fun stuff, huh?)
The Sec. 125 plan is in
compliance if the total contributions (paycheck withholdings) of the “Key” employees is not more than 25 percent
of the total contributions of ALL Sec. 125 participants!
A similar 25 percent concentration test applies separately
to Sec. 129 Dependent Care programs. The IRS code states that no more than 25 percent of benefits (contributions) in the Dependent
Care program may be attributable to the group of employees (or their spouses/dependents) who own more than 5 percent of the
company’s stock or profits.
An additional 55
percent discrimination test applies to Sec. 129 Dependent Care programs. Note that the Sec. 129 fifty-five percent test applies
to all ELIGIBLE employees, not just Dependent Care or cafeteria plan participants. First, from the population of ALL employees,
mark as “Excluded” individual employees if:
1) They are under 21 years of age
2) They have less than one year of service
3) They are covered
under a collective bargaining agreement
Plus will automatically make another pass and also eliminate any employee making less than $25,000 annually. (It might help
you comply with the 55% test – you only need to pass one of the two!)
You will also need to mark Highly-Compensated employees. In general, an employee is considered
as highly compensated (HCE) for Dependent Care benefits if:
1) He makes more than $120,000 per year or,
2) He is in the top 20 percent of the company’s ranked
3) He owns more than 5% of the Company’s stock or profits
If the average dependent care deferral of the non-highly compensated group is at least
55 percent of the Highly Compensated Group, the Dependent Care Plan meets the Sec. 129 requirements!
testing in a 401(k) plan involves comparing the ratio of 401(k) contributions divided by "eligible" wages for both
the key and non-key employees. A ratio is computed separately for each participant, and then averaged for both groups. The
point of discrimination testing is that highly-compensated (key) employees cannot contribute a much higher portion of their
wages than do the other employees.
I. Be certain that
all eligible employees are in the database. You may need to add employees who became eligible to participate mid-year, but
have chosen not to contribute funds to the 401(k) plan. Note that the Company's Personnel Department should provide you with
the list of eligible employees. These employees must meet three (3) criteria:
1. Their hire date must precede the enrollment date by at least 1 year.
must have worked at least 1000 hours during the year prior to their enrollment.
3. They must be at least 21 years
old on their enrollment date.
highly compensated employees in the employee's record if they make more than $80,000 per year. (There may be some other criteria
pertaining to stock ownership, etc.) Note also that the wage amount varies from year to year according to inflation. Check
IRC Sec. 401 to get the current key employee wage amount and other criteria, then work with the employee file to designate
"Highly-Compensated" and "Key" employees.