What is nondiscrimination testing for health and cafeteria plans?
Last updated October 2, 2026
Nondiscrimination testing checks that tax-favored benefits don't disproportionately favor highly compensated or key employees. Cafeteria plans, health FSAs, dependent care FSAs, and self-funded health plans (under Code Section 105(h)) each have their own annual tests — failing shifts taxes onto the favored group.
The tax code lets employees pay for health benefits pre-tax on one condition: the arrangement can't tilt toward the top of the org chart. Several parallel regimes enforce that:
- Section 125 tests for cafeteria plans (eligibility, contributions & benefits, key employee concentration)
- Section 105(h) tests for self-funded health plans (eligibility and benefits)
- Dependent care FSA tests, including the 55% average benefits test
Failures don't disqualify the plan — they make benefits taxable to the highly compensated or key employees the plan favored, often discovered painfully at year end.
Testing should run annually (mid-year preliminary runs leave room to correct), and the results belong in your compliance records. Employers with disproportionately highly-paid workforces or generous executive arrangements are the usual failure candidates.
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