Non-Discrimination Testing

Offering employee health benefits is a great way to attract and retain talent, but companies must follow strict regulations to ensure fairness to all employees. The IRS monitors highly compensated employees’ eligibility and compares that to benefits available to lower compensation employees. All health plans must undergo annual non-discrimination testing. Learn more below.

What is Non-Discrimination Testing?

IRS rules state that self-insured health plans cannot discriminate in favor of Highly Compensated Employees (HCEs) concerning eligibility or benefits. The non-discrimination test examines whether a benefits plan provides HCEs with better benefits than other employees regarding plan design or implementation.

Self-insured plans covered by Section 105(h) non-discrimination regulations include:

Currently, fully insured health plans are not required to follow the regulations. However, if a health plan design has fully insured and self-insured parts, then the self-insured portion is required to comply. 

An HCE is someone who falls into any of these categories:

  • One of the company’s five highest-paid officers
  • In the top 25% of all highest-paid employees
  • Owns more than 10 percent (in value) of the employer’s stock

How to Pass the Non-Discrimination Test

Health plan design is a leading cause of non-discrimination test failures. Potential plan design issues include:

  • Allowing only certain employees to participate in the plan.
  • Having different plan eligibility requirements for employee groups.
  • Having contribution rates based on employment classification.
  • Offering separate health plans for different groups of employees is also a violation.

Self-insured health plans can pass the non-discrimination test in three different ways:

  • The plan benefits 70 percent or more of all non-excludable employees.
  • Seventy percent or more of all non-excludable employees are eligible to benefit under the plan, and the plan benefits 80 percent or more of this group.
  • The plan benefits a classification of employees that does not discriminate in favor of HCEs. A plan satisfies this test if it meets two criteria – those having a legitimate business classification for any exclusions and a sufficient ratio of benefitting non-HCEs to HCEs.

The simplest way to pass the test is to treat all employees equally.

Testing and Addressing Failures

Employers with self-insured health plans should test for non-discrimination at least once a year and before the following plan year begins. If the plan fails, corrective distributions can only be made during the current plan year.

The safest approach involves monitoring the plan throughout the year to identify and correct any problems.

If a plan fails the non-discrimination test, HCEs must pay taxes on the excess benefits. If the benefits are part of a Section 125 cafeteria plan, then the plan’s non-discrimination rules will determine whether HCE plan contributions are taxable.

For 40 years, DataPath has been a pivotal force in the employee benefits, financial services, and insurance industries. The company’s flagship DataPath Summit platform offers an integrated solution for managing CDH, HSA, Well-Being, COBRA, and Billing. Through its partnership with Accelergent Growth Solutions, DataPath also offers expert BPO services, automation, outsourced customer service, and award-winning marketing services.

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