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  • Setting up dependent care FSA

    Interested in setting up a dependent care FSA for our private practice with about 40 partners, a handful of partnership track employees, and a few physician extenders.  All docs and employees are considered, "key, highly compensated" employees.

    I am being told it can not be set up without failing non-discrimination testing due to the lack of "non-key, non highly compensated employees".

    Does this sound right?  Would be a shame to pass on >$2000 instant tax savings per individual if there is a work-around.

  • #2
    The average benefit of the non-HCE's (highly compensated employees) must be at least 55% of the average benefit of the HCE's. What if you hired a bookkeeper who would participate? There is also a 20% "top paid election" that I believe you can make. Have you checked into this? Not my area of expertise but it may help you to check it out.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3

      Johanna, I believe you are referring to the “55% Average Benefits test”.  It seems we might be able to have a workaround with having one non-HCE employee that participates to the max.



      The trickier one is the "Overall “25% Concentration test” which compares all the FSA benefits elected by key employees with all the FSA benefits elected by nonkey employees. Not more than 25% of the total benefits elected by all your employees may be attributed to key employees.  Here’s an example. All elections to the FSA plan add up to $35,000. Of those total elections, Key employee elections equal $5,000. Key employee elections are about 14% of the total elections to the plan ($5,000/$35,000). In this example, the FSA plan passes the 25% Concentration test.


      My take on this is that we're stuck with a reduction to 25% of the max $5000 per joint filer, but would not fail outright.


      The third is the "25% owner test" which we would pass.



      Anyone successfully added a dependent care FSA option to their practice?


       

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      • #4
        I was reading it wrong. Average Benefits Test applies to Dependent Care FSA only and a quick read led me to believe that was the only one that mattered. Now I see what you are saying. Are you sure if there are no non-HCE employees that the tests apply?
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          No I'm not sure. I had originally thought we'd be good to go, and was surprised to get feedback that we would not pass testing.

          Was hoping to hear back here that at least one other similar group had set one up before I put in more research and push the issue.

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          • #6
            Notice 97-45 discussion top-paid election option - see V: "Implementation of Elections". Looks like this would allow 80% of the group to participate.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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