Nondiscrimination Rules for Benefit Plans

Employee BenefitsOne of the final provisions of the Affordable Care Act (ACA), the nondiscrimination rules for insured health plans, has not and may not become effective under the Trump Administration.  But did you know there are other nondiscrimination rules for benefit plans that have been in place for years?

Cafeteria plans, self-insured health plans, dependent care assistance programs and other employer provided benefits are already subject to nondiscrimination requirements under the Internal Revenue Code. These requirements are generally intended to prevent plans from discriminating in favor of certain highly compensated individuals (HCIs) or key employees.  As long as a plan meets these IRS requirements, certain employee benefits can be excluded from employees’ gross income and thus are not taxable. However, if a plan fails to comply with these requirements, there may be adverse tax consequences for highly compensated and key employees.  It is very important to take the applicable nondiscrimination rules into account when structuring your employee benefit plans in order to maintain your plans’ tax-favored status.

Although the nondiscrimination rules are complex and differ by benefit type, there are essentially three common themes:

  • Eligibility – Are enough, if any, non-highly compensated employees eligible to participate in the plan?
  • Availability – Are enough non-highly compensated employees being given the same opportunity to elect the same benefits, under the same conditions as highly compensated employees?
  • Utilization – Are enough, if any, non-highly compensated employees actually electing the plan?

Cafeteria Plans

A Section 125 plan, or a cafeteria plan, allows employers to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. To receive this tax advantage, the cafeteria plan must generally pass certain tests that are designed to ensure that the plan does not discriminate in favor of highly compensated employees. If a cafeteria plan discriminates in favor of HCIs or key employees, each member of the prohibited group will lose the cafeteria plan’s tax advantage.

Self-insured Group Health Plans

Self-insured health plans pass the Code § 105(h) nondiscrimination rule if the plan does not discriminate in favor of HCIs with respect to eligibility or benefits. If discrimination exists in favor of HCIs, the excess reimbursements received by those employees must be included in their gross income.

Dependent Care Assistance Programs

An employee can exclude up to $5,000 of dependent care benefits from their gross income if single or married and filing a joint tax return, or up to $2,500 if married but filing separate tax returns. The plan is considered nondiscriminatory if the program’s eligibility, contributions and benefits provided do not discriminate in favor of HCIs or certain shareholders or owners. If discrimination is found to exist in a dependent care assistance program, these individuals are required to include their dependent care benefits in their gross income.

Group-term Life Insurance

Generally, employer-provided group-term life insurance is excludable from employees’ gross income up to the face amount of $50,000. A group-term life insurance plan is nondiscriminatory if the plan does not discriminate in favor of key employees as to eligibility to participate, and the type and amount of benefits do not discriminate in favor of key employees. If a group-term life insurance plan is discriminatory in favor of key employees, then those employees are not eligible for the $50,000 exclusion and must include their entire coverage amount in their gross income.

Educational Assistance Programs

Employees can exclude up to $5,250 of amounts received for educational assistance programs from their taxable income. In order to be nondiscriminatory, it must benefit employees who are eligible under an employer-determined classification that is found by the IRS not to be discriminatory in favor of HCIs. If an educational assistance program violates the nondiscrimination requirements, all participants lose favorable tax treatment for their educational assistance benefits.

Insured Group Health Plans

Under health care reform, insured group health plans, except grandfathered plans, will be subject to nondiscrimination rules similar to those applicable to self-insured plans under Code § 105(h)(2). These rules were originally set to take effect for plan years beginning on or after Sept. 23, 2010. However, the nondiscrimination requirements for insured plans have been delayed indefinitely, pending the issuance of regulations.

For additional information on these nondiscrimination rules and the testing requirements, please reach out to your AssuredPartners NL Benefits Team.

Source: Zywave

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