As the new year unfolds, benefits professionals are setting their sights on the year ahead—and with that comes a renewed focus on compliance. One crucial yet often underestimated component is Nondiscrimination Testing (NDT) for Health & Welfare plans, particularly those offering Dependent Care Assistance Programs (DCAPs). Early testing is not just a best practice but a strategic move that can prevent tax headaches and compliance issues later in the year.
Understanding Nondiscrimination Testing
Nondiscrimination testing is mandated by the Internal Revenue Code to ensure that pre-tax benefits like DCAPs and cafeteria plans are equitably available to all employees, not just highly compensated employees (HCEs) or key employees. Plans that fail these tests can trigger adverse tax consequences and administrative burdens.
Why DCAPs Are High-Risk
DCAPs enable employees to use pre-tax dollars for childcare expenses but often face a higher risk of failing nondiscrimination testing. There are several reasons for this:
- Higher-income employees are more likely to participate and contribute at higher levels.
- Lower-income employees may choose not to participate due to affordability concerns or a lack of childcare expenses.
- Small employers and companies with a concentration of HCEs are at an increased risk
The Case for Early Testing
Proactive testing is the key to avoiding year-end surprises. Conducting nondiscrimination testing early—ideally within the first quarter—provides several critical advantages:
- Pinpointing compliance issues before they escalate
- Adjusting HCE contributions to mitigate disparities
- Implementing communication strategies to encourage greater participation from non-HCEs
- Reevaluating plan design and eligibility criteria to foster greater balance
Consequences of Failing the Test
Failure to pass nondiscrimination testing can result in:
- HCEs facing taxation on their DCAP contributions
- Payroll adjustments to reflect retroactive tax liabilities
- Employee dissatisfaction and increased administrative complexity
Early Testing: A Smart Investment
Early testing equips employers with the insights needed to make timely adjustments, ensuring compliance and protecting both the organization and its employees. It reflects a proactive approach reinforcing the employer’s commitment to equitable benefit offerings.
Final Takeaway
Don’t gamble with compliance. If your organization offers a DCAP, initiate nondiscrimination testing now. Early action today could prevent costly corrections tomorrow.
Do you need guidance on nondiscrimination testing for DCAPs or other employee benefit plans? Our experts at Medcom Benefit Solutions are here to help you stay compliant and confident. Contact us today to learn more!
