(for plan years effective on or after 1/1/02)

Discrimination Testing Rules and Definitions for FSA Plans
Each type of benefit available or provided under a cafeteria plan is subject to the overall cafeteria plan nondiscrimination rules.

A. Eligibility Test (Safe Harbor)
The plan may not discriminate in favor of highly compensated individuals as to eligibility to participate.

B. Overall Concentration Test
Aggregate benefits provided to key employees under the entire cafeteria plan may not exceed 25% of the aggregate benefits provided to all eligible employees. This includes employee and employer premium payments as well as pre-tax deferrals to health care and /or dependent care expense reimbursement accounts. (DOES NOT APPLY TO GOVERNMENT PLANS).


A key employee is an employee (include former or deceased employees), who at any time during the prior plan year was:

1. an officer whose annual compensation from the employer exceeds $130,000;or

2. an employee owning more than 5% of the business; or

3. an employee owning more than 1% of the business, and whose compensation exceeds $150,000 for the plan year.

Following is an explanation of the FOUR KEY EMPLOYEE classifications:

1. For an officer to be considered a key employee, the officer must be an officer-in-fact and not merely an officer-in-title.

An excerpt from the Tax Equity and Fiscal Responsibility Act (TEFRA) committee report explains the guidelines: ...the determination as to whether an employee is an officer is to be determined upon the basis of all the facts and circumstances, including, for example, the source of the employee's authority, the term for which elected or appointed, and the nature and extent for the employee's duties. As generally accepted in connection with corporations, the term "officer" means an administrative executive who is in regular or continued service. It implies continuity of service and excludes those employed for a special and single transaction, or those with only nominal administrative duties. Thus, for example, all the employees of a bank who have the title of vice president or assistant vice president would not automatically be considered to be officers.

The numbers of officers-in-fact to be considered key employees is limited to the greater of 3 officers or 10% of the employees. No more than 50 officers will be considered key employees, regardless of the number of employees. If there are more officers-in-fact than the numerical limit, the officers with the highest compensation will be considered key employees.

2. An employee who is a 5% owner or greater is a key employee.

An employee owns a 5% or greater interest in a corporate employer if the employee owns 5% or more of the employer's outstanding stock or stock possessing 5% of the total combined voting power of all stock of the employer. An employee is also treated as owning stock owned by certain members of the employee's family or, in certain cases, by partnerships, estates, trusts, or corporations in which the employee has an interest. Family members whose ownership is attributed to the employee are parents, spouses, children and grandchildren.

3. A more than 1% owner with compensation greater than $150,000 is a key employee.
Ownership is determined by the above rules.

Generally, the term 'highly compensated employee' includes:

1. an officer; or

2. a shareholder owning (directly or through related individuals such as spouses and lineal ascendants of descendants) more than 5% of the voting power or value of the employer; or

3. any person who during the preceding year was an employee who received compensation of at least $90,000; or

4. a spouse or dependent of any of the foregoing.


Non-excludable Employee

Very generally, this is the total number of employees of the employer, (including part-time employees), less the following permitted exclusions:

1) Collectively bargained (union) employees, if the option to participate in the plan was part of the collective bargaining process, and the union group is not allowed to participate in the plan because the group declined the option to participate, then the group can be excluded for purpose of the benefits test.

2) Individuals who have not met minimum age or service requirements to participate in the plan as stated in the Plan Document, can be excluded. Please note that the service requirement cannot exceed one year and the age requirement cannot be higher than 21. If the plan does not have an age or service requirement, those under age 21 or with less than one year of service cannot be excluded from this number.

Owners should only be included in this number if they are employees of the employer.
Eligible 'Non-excludable' Employee

Using the plan's eligibility definition, determine whether there are 'non-excludable' employees who are not eligible to participate in the plan. Remove all of those employees that are not eligible and the remaining number should reflect all employees eligible for the plan. It should be equal to or less than the number of 'non-excludable' employees. (Note: the exclusions available under the 'non-excludable' employee determination are available under the same conditions for this determination.)

Includes all companies or entities that are part of a controlled group of corporations or an affiliated service group.

Top Paid Group:
The top 20% of employees ranked on the basis of compensation during the preceding plan year. In calculating 20% of employees, you may exclude employees who:

1. work less than 17 1/2 hours per week,

2. have less than 6 months of service,

3. work less than 6 months per year,

4. are members of a collective bargaining agreement not included in the plan,

5. are less than age 21 at the end of the year.