When you hear the words “non-discrimination tests” your first thoughts might be your 401(k) plan, but there are non-discrimination rules that apply to health and welfare plans. A word of warning, how to apply the nondiscrimination requirements is not always clear; having some experience with the qualified plan coverage rules will be of great value.
The basic premise of any non-discrimination testing is to demonstrate that the plan does not discriminate in favor of highly compensated individuals (HCI). Please note that the HCI definition is not exactly the same as the HCE definition used in qualified plans. The tests generally relate to not discriminating as to eligibility, contributions and benefits and in favor of either key employees or HCIs.
Non-discrimination testing
The following ERISA health and welfare plans are subject to non-discrimination testing:
- Group Life Insurance Plans (IRC §79)
- Self insured health plans (IRC §105)
- Cafeteria plans (IRC §125)
- Dependent care plans (IRC §129)
- Health Savings Accounts
Generally, group life insurance plans satisfy the nondiscrimination rules by design.
NOTE: Health Care Reform applied the §105(h) nondiscrimination rules to non-grandfathered insured plans effective for plan years beginning after 9/23/2011. However, The IRS issued Notice 2011-1 which postpones the application of the nondiscrimination rules to insured plans until “regulations or other administrative guidance” is issued.
What tests must be performed?
The basic premise of any non-discrimination tests are to demonstrate that the plan does not discriminate in favor of highly compensated individuals (HCI). Please note that the HCI definition is not exactly the same as the HCE definition used in qualified plans. The tests generally relate to not discriminating as to eligibility, contributions and benefits and in favor of either key employees or HCIs.
The following tests must be performed annually:
Cafeteria Plans (Section 125)
- The Eligibility Test (Employment & Entry Requirements)
- The Eligibility Test (Nondiscriminatory Classification Test)
- The Contributions and Benefits Test – Availability & Utilization
- The Key Employee Concentration Test
- Dependent Care (Section 129)
- The Eligibility Test
- The Contributions and Benefits Test
- The More than 5% Owners Concentration Test
- The 55% Average Benefits Test
- Health FSA (Section 105h)
- The Eligibility Test
- The Benefits Test
- HRA
- The Basic Test
- The Eligibility Test
- The Benefits Test
- Self-Insured Plans
- The Eligibility Test
- The Benefits Test
What are the consequences of a failed test?
A failed test does not impact a nonhighly compensated employee/individual.
Self-insured plan
In the case of a discriminatory benefit available to HCIs but not to all other participants, or otherwise discriminates in favor of HCIs as opposed to other participants, the amount of excess reimbursement equals the total amount reimbursed to the HCI with respect to the benefit.
In the case of benefits (other than discriminatory benefits noted above) paid to an HCI under a plan which fails nondiscriminatory eligibility requirements, the amount of excess reimbursement is determined by multiplying the total amount reimbursed to the individual by a fraction; the numerator of the fraction is the total amount reimbursed during that plan year to all HCIs. The denominator of the fraction is the total amount reimbursed during that plan to all participants.
Cafeteria plan
A highly compensated participant or key employee participating in a discriminatory cafeteria plan must include in gross income the value of the taxable benefit with the greatest value that the employee could have elected to receive, even if the employee elects to receive only the nontaxable benefits offered.
Dependent care assistance plan
Benefits provided for the HCEs will be included in income.
