If your clients pay premiums based on employee class, you may want to have a benefits consultant on speed dial. Here's why.
I was recently asked about nondiscrimination rules and how they affect employers who contribute different amounts of premium toward different employee classes. Then another question came in asking if owners of an S-Corp can be excluded from the various testing that the nondiscrimination rules require. It seems when one of these questions comes in, more follow. So, I set about researching to see if I could translate the regulations into something resembling English. And opened a can of worms….
As of this blog post, I am still nailing down the ins and outs of this exciting topic (yes, tongue in cheek here) and trying to decode the regulations. Lucky you, I won’t bore you with the details…yet. I figure since you are in the heat of the Q4 battle, I won’t push you over the edge.
Let me just provide some FAQs that you may want to know about as you work on your renewals. I am not providing you with any of the testing rules, or how to do the calculations. It will only give you a headache. Suffice it to say that if your client has a plan that is self-funded (including an HRA or an FSA), make sure the vendor does the Section 105(h) testing on those plans. Then, for the Section 125 plan (including just a Premium Only Plan), the vendor should be conducting the “typical” nondiscrimination testing – there are three of them. If you need vendor recommendations, let me know!
Here are some common scenarios and the basic answers to the questions of:
1) What nondiscrimination tests are required and,
2) Where the danger of failing lies.
Please note, as I mentioned above, these rules are very complex and this information is only provided as a guide.
Q: If a company pays more, in premium or contributions, for certain classes of employees, what are the potential nondiscrimination issues?
A: If the plan is self-funded, the plan will fail the Section 105(h) discrimination testing. The company will need to provide the same employer contribution for all classes of employees. If the plan is fully insured, this section of the rules does not apply to the plan; however, if the plan is fully insured and the company offers an FSA, they will need to go through Section 125 testing to determine if the plan passes those nondiscrimination rules.
Q: If a company pays the same toward all employees’ premiums, offers the same benefit plans to all employees, and all employees have the same waiting periods, will the plan automatically pass nondiscrimination testing?
A: Not necessarily. If the plan is self-funded, the plan will pass the first test of the Section 105(h) rules, called the Benefits Test, but it will still need to pass the Section 105(h) Eligibility Test. Plus, if premiums run through a Section 125 plan, the plans will also need to pass the Section 125 Eligibility Test, Contributions & Benefits Test, and Key Employee Concentration Test. If the plan is fully insured, and premiums run through a Section 125, the plan will also need to pass these same three Section 125 tests.
Q: A company is an S-Corp and the owners are not considered “employees” – can they be excluded from the Section 105(h) nondiscrimination testing (for a self-funded plan) and the Section 125 nondiscrimination testing (for the Section 125 program)?
A: Some of the tests are based on headcounts and/or total carrier premiums and do not allow a company to remove owners, partners, etc. It may seem counterintuitive, since some individuals in a company may not be allowed to run premiums pre-tax through a Section 125 plan, but they’ll still need to be included in some of the required tests.
Q: A company is a Partnership and provides only fully insured plans. If they pay 100% of the partners’ premiums and 75% of all other employees’ premiums will they fail the nondiscrimination testing?
A: Since this company’s plans are fully insured, they will need to pass only the Section 125 nondiscrimination testing. Covering different amounts by class will not cause a plan to automatically fail. A company will need to go through the Section 125 testing to see if they pass.
No doubt, there are dozens more scenarios than I have outlined and probably hundreds more outcomes based on all the permutations. My best advice, if you have a client offering different levels of benefits to different classes of employees is:
a) Make darn sure your client knows there may be nondiscrimination issues
b) Be joined at the hip with an uber-knowledgeable TPA, and/or
c) Have a benefits consultant or attorney on speed dial
Or, pray your client doesn’t find themselves being audited by the DOL.
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I love numbers. I'm a math geek. I read benefits industry articles and periodicals for relaxation (but, honestly, I'm still a fun gal). I also like to share what I've learned and you'll find it all here.