What happens if a Plan fails the discrimination test? Are other firms conducting the discrimination tests?

All Section 125 plans (including premium conversion plans) should have all proper testing done and any company that is not insuring it is, is risking their entire plan. Testing should be done prior to the beginning of the plan year (as was discussed in the last posting on this topic) and appropriate adjustments made to insure compliance prior to the start of the plan year. Interm testing may also be required if there is a significant change in participation during the plan year and appropriate adjustments, if any, made at that time. For example, a large group of employees are hired or the company downsizes either situation could radically alter the testing results.

Lisa is right, all plans need to pass several tests. some will be passed by virtue of proper plan design. Others are actual numeric tests. The IRS can impose fines and penalties on the employer, the employee, or both, in addition to collecting all back withholding and FICA if the plan is disallowed.