Nondiscrimination Testing presentation 3

Nondiscrimination Testing Rules for Health Plans

WASBO Accounting Seminar March 20, 2013 Speakers:

Matthew J. Flanary Linda R. Mont

Agenda  Nondiscrimination

Testing



Health Plans – Section 105(h) Rules



Cafeteria Plans – Section 125 Rules (Briefly)

 Plans

Requiring Testing

 The Rules  Health

And Tests

Reform

 Planning

Now For Future Changes

Nondiscrimination Testing Currently

Applies To:

Self-Funded

Health Plans (Section

105(h) and Cafeteria Plans (Section 125)

The testing is different, but the goals are the same –

Nondiscrimination Testing Assure Plans Do Not Discriminate In Favor Of: Highly-Compensated Individuals (HCIs) For Section 105(h) Plans Highly-Compensated Participants Or Individuals (HCEs) for Section 125 Plans *Very Different Definitions

Definition of Highly Compensated Section 105(h)(5) One of the employer’s five highest-paid “officers” A shareholder owning more than 10% of the employer’s stock Among the top 25% highest-paid non-excludable employees

Section 125(e) “Officers” A shareholder owning more than 5% of the voting power or value “Highly Compensated Employees”* Spouses and Dependents of one of the above

*Guidance referenced 414(q) rules – Compensation in excess of $115,000 (adjusted for inflation in future years) in the preceding year and, possibly, also one of the highest paid 20% of employees

Health Plan Testing If an employer wishes to provide a tax-free health benefit to employees, the employer must ensure, via nondiscrimination testing, that a self-insured health plan does not unduly favor the highly compensated individuals (HCIs) with respect to either eligibility to participate or benefits.

Code Section 105(h) 

Not A New Requirement



Currently Applies To Self-Insured Health Plans



Testing Is Done Annually (Regardless Of Plan Size) A Self-Insured Health Plan Is One In Which The District Bears The Risk Of Paying The Claims, Including: ◦ Self-Insured Medical/Drug Plans  The Existence of Stop-Loss Insurance Doesn’t Matter ◦ Health Reimbursement Arrangements (HRA)

Code Section 105(h) Does NOT Apply To Insured Plans  

Some Insurance Requirements In Wisconsin Without Section 105(h), Fully Insured Plans Can (For Now) Have:  Different Eligibility By Employee Classification  Different Coverage By Employee Classification  Different Medical Coverage For

Different

Retirees  Different Lengths Of Time Or Dollar Amount Of Retiree Medical Coverage

Code Section 105(h) Currently  Official Guidance Is Limited.  More Speculation Than Regulation History  Legislation Passed In 1978  Regulations Issued In 1981 

A Handful Of IRS Rulings

 Law Repealed In 1986

 Law Retroactively Reinstated In 1989  IRS “No Ruling” Topic

Ever Since

Health Care Reform Changes In The Future  PPACA

Expands The Current Rules To NonGrandfathered, Fully-Insured Health Plans  But With Very Different Consequences

 Originally Scheduled

For 2011  IRS Notice 2011-1 Delayed The Effective Date Until After Regulations Are Published  Later This Year?

Consequences of Noncompliance Self-insured plans Excess reimbursements

to HCI- Taxable Benefits – 100% of discriminatory benefit Eligibility – percentage paid to HCI

A Two-Part Test To Comply With Code Section 105(h),

A Plan Must Satisfy Both:  The Eligibility  The Benefit

Test

Test

Eligibility Test A Plan Must Meet One Of The Following Tests: 

70% Or More Of All “Considered” Employees Benefit Under The Plan



70% Or More Of All “Considered” Employees Are Eligible AND 80% Or More Of All Eligible Employees Benefit Under The Plan



The Plan Benefits A Classification Of Employees Which The IRS Finds To Be Nondiscriminatory Using Rules Similar To Those Found In Code Section 410(b)  

The 70% Short-Hand Rule Query: Governmental Plans Are Exempt From 410(b)

Excludable Employees 105(h) 125 Employees Subject To Benefits Bargaining Non-Resident Aliens Earnings Under $25,000 Less Than 3 Years Of Service Less Than 1 Year Of Service “Part-Time Employees” “Seasonal Employees” Under Age 25 Under Age 21

x x

x

129 410(b) x

x

x x x

x

x

x

x x x

Excludable employees are only excluded for 105(h) eligibility test – not benefits test and only if not participating in any self-insured plan of the employer

Nondiscriminatory Classifications  Reasonable:   

Salaried vs. Hourly Geographic Location Similar Bona Fide Business Criteria

 Not Acceptable:  

Naming Individuals Criteria Having Substantially The Same Effect

The Benefits Test For a plan to be considered nondiscriminatory with respect to benefits, the plan must provide the same benefits for both highly compensated and non-highly compensated individuals.

What’s A “Benefit” Contributions and waiting periods are considered benefits (See, PLR 8411050, 8411051, 8336065 and 8423036)

Contributions based upon compensation are per se discriminatory (See Treas. Reg. §1.105-11(e)(4), Example 6) Question about dollar amount per year of service – is that considered a different contribution?

Example: HRA Benefit Classification Contribution Per Year

Maximum Contribution

Eligibility/Vesting

Administrators $2,000

$60,000

Vested after 5 years

Teachers

$2,500

No maximum Vested at age 56 with 15 years of service

NonRepresented Staff

$1,000

$30,000

Vested after 5 years

What’s A “Plan” An employer may designate two or more plans as constituting a single plan that is intended to satisfy the requirement of [Code] section 105(h)(2) and paragraph (c) of this section, in which case all plans so designated shall be considered as a single plan in determining whether the requirements of such section are satisfied by each of the separate plans. . . . A single plan document may be utilized by an employer for two or more separate plans provided that the employer designates the plans that are to be considered separately and the applicable provision of each separate plan. - Treas. Reg. §1.105-11(c)(4)(i)

Health Reform 

Did Not Change Existing Tests



New Rules Will Eventually Require Non-Grandfathered Insured Group Health Plans To Satisfy Similar Nondiscrimination Rules



Originally Applied To Plan Years Beginning On Or After September 23, 2010



IRS Announced Compliance Will Not Be Required Until The Plan Year After It Issues Regulations Or Other Guidance For Insured Plans



Until These Rules Apply, Such Plans Are Only Subject To Indirect Requirements Like The Cafeteria Plan Rules

Retiree Only Plans  PPACA Exempt

Retiree-Only Plans From Many Of The New Requirements  It’s Possible That The Yet-To-Be Published Insured Plan Regulations Will Also Exempt Retiree-Only Plans.  It’s Also Possible That Non-Federal Government Plans Will Be Exempt

Section 125 Implication If employees make a pretax contribution for health insurance coverage (for a fully insured or self-insured plan), there is required nondiscrimination testing for Section 125 cafeteria plans that your flex administrator should currently be performing on an annual basis.

Employee Contributions?  Fully-Insured Medical Plan 

Contributions on Pretax Basis:  Administrators

pay 5% of premium  Teachers pay 8% of premium  Custodians pay 10% of premium  Section 105(h) rules do not apply  Section 125 apply 

This plan would likely violate the cafeteria plan Contributions and Benefits Test, causing the value of the coverage to be taxable to HCIs.

What To Do Now Review Current Plans: Section 105(h) Plan Testing Section 125 Plan Testing

 Consider

Potential Changes  Add Protective Language To All Contracts And Handbooks  Consider Adding Multiple Plan Language And Retiree-Only Plan Language

Reserve Your Rights Consider Adding To Contracts And Handbooks: “The District reserves the right to make changes to coverage if future testing rules or plan structure makes it impossible to provide coverage.”

Consider Adding To Plan Documents: “This Plan Document describes benefits for multiple classes of employees and the Employer reserves the right to treat reasonable classifications of employees and employee groups as multiple health plans for purposes of satisfying the requirements of Code Section 105(h), as permitted under Treasury Regulation Section 1.105-11(d)(4)(i).”

Thank You