Client has 125 plan for medical and dependent care expenses and medical insurance premiums. All contributions are funded by the participant.

What are the limitations on key employees? If the key employees' deferrals exceed 25% of total deferrals, what happens??

Please excuse my ignorance. I have very limited knowledge in this area.

Thanks for any help!

Most plan documents have some sort of provision which allows the elections of the key employees to be bumped down so that the tests will pass. Most testing is done as soon as the election forms are completed, so the correction can be made before the start of the plan year. We have made midyear corrections when necessary. You cannot correct and refund after the plan year is over.

I agree with the above comments, but I also believe that if the testing proves discriminatory in favor of the key employees at the end of the year, the W2 would have to be adjusted and the "excess" would become taxable.

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