The Department of the Treasury has recently issued proposed rules for nondiscrimination testing that apply to Dependent Care Assistance Programs (DCAP). Nondiscrimination tests for health insurance plans have typically been quite confusing and difficult for employers/health plans to utilize, since the rules are written in legalese and there has been no official guidance to clarify confusing wording. These updated rules are an attempt to assist in streamlining the testing process.

The proposed non-discrimination tests are as follows:

- The DCAP cannot discriminate in favor of highly compensated employees, either in writing or in practice. If an employer offers a DCAP with the same terms and benefits for all participants, then the DCAP is considered to not be discriminatory.

- DCAP benefits must be offered to plan participants in a way that is objective and reasonable. The tests recommended in the proposes rules (a “facts-and-circumstances” test and “numerical safe harbor”) are the same as the nondiscrimination tests used for retirement plans.

- No more than 25% of DCAP benefits can be used to benefit the Company’s owners and principal shareholders.

- The amount of benefits provided to non-highly compensated employees must be at least 55% of the benefits provided to a highly compensated employee. This rule will be limited to DCAPs only.

It is important to note that these rules as currently proposed will also affect the new Section 128 child savings accounts (Trump Accounts) established under the One Big Beautiful Bill Act (except where otherwise noted).

The proposed rules also clarify that all tests must be satisfied by the end of the plan year. Should an employer not be in compliance with these tests, the proposed rules provide an avenue for correction: any excess benefits provided will be reported on the employer’s W-2 form as income.

You can read the proposed rules HERE.