Nondiscrimination Testing Rules for Health Plans

Transcription

1 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 And Tests Health Reform Planning Now For Future Changes Key Benefit Concepts, LLC 1

2 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 Key Benefit Concepts, LLC 2

3 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 nonexcludable 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. Key Benefit Concepts, LLC 3

4 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 Key Benefit Concepts, LLC 4

5 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 Non Grandfathered, Fully Insured Health Plans But With Very Different Consequences Originally Scheduled For 2011 IRS Notice Delayed The Effective Date Until After Regulations Are Published Later This Year? Key Benefit Concepts, LLC 5

6 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 Test The Benefit Test Key Benefit Concepts, LLC 6

7 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) (b) Employees Subject To Benefits Bargaining x x x x Non Resident Aliens x Earnings Under $25,000 x Less Than 3 Years Of Service x Less Than 1 Year Of Service x x Part Time Employees x Seasonal Employees x Under Age 25 x Under Age 21 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 Key Benefit Concepts, LLC 7

8 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. Key Benefit Concepts, LLC 8

9 What s A Benefit Contributions and waiting periods are considered benefits (See, PLR , , and ) Contributions based upon compensation are per se discriminatory (See Treas. Reg (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 Non- Represented Staff $1,000 $30,000 Vested after 5 years Key Benefit Concepts, LLC 9

10 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 (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 Key Benefit Concepts, LLC 10

11 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. Key Benefit Concepts, LLC 11

12 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 could 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 Key Benefit Concepts, LLC 12

13 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 (d)(4)(i). In order to comply with Treasury Circular 230, we are required to inform you that any advice that we provide in this material or in the accompanying presentation concerning federal tax issues is not intended or written to be used, and cannot be used, to avoid federal tax penalties, or to promote, market, or recommend to another person any tax advice addressed herein. This seminar, including the accompanying materials and presentation, are intended to provide general information only and should not be construed as legal advice. Attendance at a seminar does not create an attorney-client relationship with either the presenter or Buelow Vetter Buikema Olson & Vliet, LLC. You should seek specific legal advice concerning your specific situation before acting upon any information provided as part of this program. Key Benefit Concepts, LLC 13

14 Thank You Key Benefit Concepts, LLC 14