Cafeteria plan nondiscrimination testing: what is tested and why it matters
A Section 125 plan must not favor highly paid or key employees. The tests are simple to run and costly to fail, so they belong on the annual calendar.
Six Parts of Plan Testing.
Student Loan Repayment Benefit
Another pre-tax style benefit employers add.
FSA and HRA Administration
How flexible spending accounts are administered.
Health Savings Accounts for Employers
Pairing a savings account with the plan.
ERISA Compliance Checklist
A checklist of plan compliance duties.
Summary Plan Description Guide
Where plan rules are written down for employees.
Employer Benefit Limits for 2027
The federal limits that apply this year.
Running the tests early enough to fix a failure.
Timing is the practical lesson. Testing late in the plan year leaves little room to correct a failure, while testing earlier lets the employer adjust contributions or elections before year-end. Many plan administrators can run preliminary tests mid-year using actual data, which turns the annual test from a surprise into a checkpoint.
Document the outcome. A dated record of when the tests ran, what they showed and what you did in response is the proof you want if anyone asks. The tests are technical and a failure lands on particular groups of employees, so rely on your plan administrator and check the details with your advisor or counsel.
Questions About Cafeteria Plan Testing.
Direct replies for HR leaders, finance teams and transaction teams.
What Does a Cafeteria Plan Have to Pass?
Tests on who is eligible, how contributions and benefits are spread, and whether key employees get too large a share of the benefits.
Who Counts as a Key Employee?
Generally officers, certain owners and the most highly paid, under the definitions in the tax code.
What Happens If the Plan Fails?
Highly paid or key employees may have to include benefits in taxable income, so catch problems early.
When Should Testing Be Done?
Before the plan year ends, so you can adjust elections or contributions while there is still time.
Can a Small Employer Use This?
Frequently, although eligibility and price depend on group size. Tell us how your group is set up and we will explain which of these apply.
Do the Rules Change Each Year?
The limits and compliance update pages on this site carry current figures, since annual limits and some requirements change.
Who Should We Involve?
Legal questions belong with your attorney or tax advisor, cost questions with finance, and design and vendor questions with a benefits advisor.
Can You Review What We Have Now?
Yes. Send over the plan documents and the renewal, and we will explain your position and the alternatives open to you.
What Should We Send You First?
A summary of your current plan, the renewal, plus any policy or vendor contracts in play.
How Do We Start?
Send the renewal and the date by which a decision is due. We will go through it and present your choices.
What happens if a cafeteria plan fails a test?
The consequences typically affect the tax treatment of benefits for certain employees. The details are technical, so talk to your advisor or counsel as soon as a failure is identified.
Do small employers have to run these tests?
Cafeteria plans generally need to pass the tests, though some small-employer designs have safe harbors. Ask your advisor which applies to you.
Ready? Upload your renewal, or talk it over with someone first. There is no charge and no commitment.
This is general information only, not legal or tax advice. For plan-specific questions, consult the plan documents or the carrier.
The Law Behind This Topic.
Each law named here links to its source statute or regulation. The content is general information rather than legal advice, and rules change, so read the current text and consult your attorney.
Cafeteria Plans (26 U.S.C. 125)
The tax provision governing cafeteria plans, nondiscrimination requirements included.
Definitions Under ERISA (29 U.S.C. 1002)
Sets out what counts as an employee welfare benefit plan, along with related terms, under ERISA.
Related Benefit Reading.
Cafeteria Plans for Employers
The page this belongs to.
Employer Benefits Guides
The full section.
Employer Benefits Compliance Updates
Recent changes employers should track.
Want Your Plan Tested? Send Us the Data.
Expect a verdict on whether it is competitive, the opportunities we spot and five questions to put to your carrier. There is no charge and no obligation.
The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents, plus two more for groups of 50 or over. Nothing beyond that, since each extra item only delays the review.
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