A Section 125 cafeteria plan, which lets employees pay premiums and fund FSAs with pre-tax dollars, must pass nondiscrimination tests showing it doesn’t disproportionately favor highly compensated or key employees. Failing the tests makes those individuals’ pre-tax benefits taxable.
Section 125 Testing
A Section 125 cafeteria plan lets employees pay for benefits pre-tax, subject to nondiscrimination testing. These FAQs explain the testing and why it matters.