Cafeteria Plan Nondiscrimination Tests
Question: What are the cafeteria plan nondiscrimination tests, and what is the definition of highly compensated for each?
Short Answer: Each component of the cafeteria plan has a different set of nondiscrimination tests and the definition of highly compensated.
Cafeteria Plan Nondiscrimination Testing (§125)
a) Nondiscrimination Test Components
- Eligibility Test
- Contributions and Benefits Test
- Key Employee Concentration Test
b) Cafeteria Plan NDT: Highly Compensated Participant (HCP)
Individuals are considered highly compensated as a HCP for purposes of the Eligibility Test and the Contributions and Benefits Test if they are:
- An officer;
- A more-than-5% owner of the employer in the current or preceding year; or
- An employee who earned in excess of $125,000 (2020 testing) or $130,000 (2021 testing) in the prior plan year, or current plan year in the case of the first year of employment (Note: Top 20% alternative may be available via top-paid group election).
c) Cafeteria Plan NDT: Key Employees
Individuals are considered highly compensated as a Key Employee for purposes of the Key Employee Concentration Test if they are:
- An officer with annual compensation for the current plan year in excess of $185,000 (2020 testing);
- A more-than-5% owner; or
- A more-than-1% owner making at least $150k (all testing years).
Health FSA Nondiscrimination Testing (§105(h))
a) Nondiscrimination Test Components
- Eligibility Test
- Benefits Test
b) Health FSA NDT: Highly Compensated Individual (HCI)
Individuals are considered highly compensated as a HCI for purposes of §105(h) if they are:
- One of the top five highest-paid officers;
- A shareholder who owns more than 10% of the value of the employer’s stock; or
- Among the highest-paid top 25% of all employees in the current plan year.
Dependent Care FSA Nondiscrimination Testing (§129)
a) Nondiscrimination Test Components
- Eligibility Test
- Contributions and Benefits Test
- More-Than-5% Owner Concentration Test
- 55% Average Benefits Test (Most Common NDT Failure)
b) Dependent Care FSA NDT: Highly Compensated Employee (HCE)
Individuals are considered highly compensated as an HCE for purposes of the dependent care FSA NDT if they are:
- A more-than-5% owner of the employer in the current or preceding plan year; or
- An employee who earned in excess of $125,000 (2020 testing) or $130,000 (2021 testing) in the prior plan year (Note: Top 20% alternative may be available via top-paid group election).
For more details on various nondiscrimination testing issues:
- Failing the Dependent Care FSA 55% Average Benefits Test
- The Top-Paid Group Election and Other Alternatives to Avoid NDT Failures
- Nondiscrimination Rules for Different Health Plan Contribution Structures
- 105(h) Nondiscrimination Rules for Specialty HRAs
- HSA Nondiscrimination Rules (Comparability vs. Cafeteria)
- Group-Term Life Insurance §79 Nondiscrimination Rules
For more details of everything related to cafeteria plans, see our Office Hours Webinar: Section 125 Cafeteria Plans.
Regulations
Office Hours Webinar: Section 125 Cafeteria Plans

About the author
Brian Gilmore
Lead Benefits Counsel
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.
The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.
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