Discrimination Testing
The Internal Revenue Service (IRS) requires that cafeteria benefit plans annually pass a series of discrimination tests designed to show that eligibility and plan benefits are applied fairly and uniformly, which in turn allows employers to avoid unfavorable tax consequences. Tests generally fall under the categories of eligibility tests and utilization tests.
Plan eligibility must be fair, consistent and reasonable, and tests must demonstrate that eligibility is not limited to or weighted in favor of key or highly compensated employees. Employees that can be excluded include those with less than three years of service; under age 25; part-time or seasonal employees; non-resident aliens; and collective bargaining employees.
Utilization tests, which are also called concentration and benefits tests, show that comparable benefits are utilized by a fair number of employees at all compensation levels and in all positions. Businesses can hire firms that conduct discrimination testing.
