Non Discrimination Testing

Report
Continuing Education - Presented by
Susan P. Luskin, FLMI, CLU, CEBS, RHU
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
Non-Grandfathered plans must comply
starting the first plan year following
September 23, 2010.
Grandfathered plans
must comply starting
the first plan year
following Jan 1, 2014.
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Applies to group medical, dental and vision
plans.
◦ Does not apply to voluntary dental and vision plans
◦ Does not apply to disability, life, or long term care
plans
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Purpose – to eliminate discrimination in favor
of key and highly compensated employees.
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For plan testing purposes, the Internal
Revenue Code treats 2 or more employers as
a single employer if there is sufficient
common ownership or a combination of joint
ownership & common activity.
Code Sections 414(b),
(c) and (m)

Applies to corporations, partnerships, sole
proprietorships and all forms of business
entities
◦ Controlled group of corporations
◦ Trades of businesses under common control
◦ Affiliated service groups
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Consider constructive ownership and
attribution rules.
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All regular full time employees
All leased employees
All non-seasonal employees (works more
than 120 days per year)
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Part-time employees may be excluded – less
than 20 hours per week
Temporary employees may be excluded
May exclude employees covered by a
collective bargaining plan as long as they
have their own benefits.
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One of the top 5 highest paid officers.
A shareholder who owns more than 10% of
the employer’s stock
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One of the highest paid 25% of all employees
◦ Not counting excludable employees who are not
participants.
◦ Employees who have not completed 3 years of
service.
◦ Employees who have not attained age 25
◦ Part-time or seasonal employees
◦ Collectively bargained employees
◦ Non-resident aliens with no US income.
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
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Constructive ownership rules of Code Section
318 apply
Options to acquire stock must be taken into
account when determining stock ownership.
This is not the same definition of highly
compensated that we use for Section 125
Plans.
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Define – the plan may not discriminate in
favor of the HCE as to eligibility to
participate.

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70% test – 70% or more of all employees must
benefit under the plan.
80% test – 80% or more of all employees who
are eligible to elect to participate (benefit)
under the plan, as long as 70% of all
employees are eligible.

Safe harbor percentage test – the plan’s ratio
percentage must be greater than or equal to
the applicable safe harbor percentage.
◦ Determine the plan’s ratio percentage
(All non HCE who benefit / All non-excludable non-HCE)
(All HCE who benefit / All non-excludable HCE)

Safe harbor percentage test – the plan’s ratio
percentage must be greater than or equal to
the applicable safe harbor percentage.
◦ Determine the plan’s non-HCE concentration
percentage
All non-excludable non-HCE
(non-excludable HCE + non-excludable non-HCE)
◦ Determine the Safe Harbor Percentage from IRS
Code Table
◦ Compare the ratio percentage with the Safe Harbor
percentage – passed if RP is greater than or equal to
SHP.

If the Safe Harbor Percentage test fails, as a
last resort try the non-SHP test. Same
equations, but different requirements.

Employees must all satisfy the same
employment requirements in order to be
eligible.
◦ No class of employee can have a longer waiting
period than any other class of employee or the plan
will fail.

Employees must all satisfy the same
employment requirements in order to be
eligible.
◦ Compare with similar rule for Section 125 plans
◦ Entry requirement – All individuals who have
satisfied the employment requirement must begin
participation in the plan no later than the 1st day of
the 1st plan year beginning after the date the
employment requirement is met.
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The benefits who are available to the HCE
must also be available to the NHCE
◦ No phantom availability.
◦ Employer contributions available on a nondiscriminatory basis.
◦ Benefits available on a non-discriminatory basis.
◦ Same qualified benefits must be available for
similarly situated participants at the same price.
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The benefits who are available to the HCE
must also be available to the NHCE
◦ Available employer contributions for similarly
situated participants must be the same, and all
participants must have the same options to use
them.
 Geographic differences
 Family member coverage differences
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The benefits who are available to the HCE
must also be available to the NHCE
◦ If optional benefits are offered, all participants
must be able to elect each benefit option for the
same additional contribution.
◦ Benefits may NOT vary based on age, years of
service or compensation.
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No adverse tax consequence for HCE
Excise tax of $100 per day per
employee/participant discriminated against.
– Section 4980D of the Code
◦ Exception for employer group of 2-50
◦ Exception may only apply where
the discrimination results from
the underlying insurance policy itself.
◦ More guidance needed
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Excise tax may not exceed the lesser of 10%
of the group health plan costs or $500,000
No penalty is the failure to pass the test is
due to reasonable cause and corrected within
30 days of discovery.
Identify individuals to whom the failure
relates
◦ Excluded individuals
◦ Individuals receiving “better” benefits
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PPACA non-discrimination requirements
included in ERISA and PHSA
◦ Participant or DOL can bring lawsuit to compel
compliance
◦ Lack of clarity regarding whether issues may be
subject to the penalty under PHSA (Public Health
Service Act)
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Still unanswered – After tax treatment of S Corp Shareholders and LLC members
Q- What happens in an S corporation or LLC if the corporation or LLC pays 100% of the
owner premium, and then the same lower amount for all of the other employees,
whether highly compensated or not? I am assuming that they are reporting this premium
on the K1 as imputed income, and then deducting it back on the 1040. Assume they
want to change their health plan at open enrollment and will not be
grandfathered. Also, what about partners in a partnership? That would be true equity
partners and not income partners. This was never an issue for Section 125, as none of
the above could pretax anything. They are always outside of a Cafeteria Plan.
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Still unanswered – After tax treatment of S Corp Shareholders and LLC members
A- Code section 105(g) excludes self-employed individuals under Code section
401(c)(1) from this provision; therefore if the owner is not an employee-owner (defined
in section 401(c)(3)), it is reasonable to not trigger 105(h) violations under this
approach. With respect to partners, the definition of employee-owner may cover more
than 10% partner. In that event, differences in premiums charged to highly versus nonhighly compensated individuals could trigger 105(h) penalties.
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Q - If an employer has both union and non-union
employees, must they be given the same plan, or
can you test the non-union employees separately?
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Although there is no clear guidance on this issue, benefits attorneys take the position
with respect to differences in benefits between union and non-union groups is that
there are arguments in support of the view that such distinctions comply with Code sec.
105(h). For example, if there are some highly compensated individuals on both the
union and non-union side, that would support an argument that the union/ non-union
classification is reasonable, which would mean that as long as each group receives the
same benefits as the other members of the group, the 105(h) rules could be satisfied
(e.g., by designating the benefits provided to that group as being provided under a
separate plan). See Treas. Reg. sec. 1.105-11(c)(4). Even if all union employees are
non-highly compensated individuals, this same argument could be made, given the
differences in how benefits are decided upon in the collectively bargained context
(although there is no direct support for this position). Alternatively, it may be possible
for the employer to rely on the exception under the 105(h) eligibility test that allows
collectively-bargained employees who are not participating in the plan to be excluded
from the plan, although this exception leaves open the question of how the benefits test
applies. See Code § 105(h)(3)(B); Treas. Reg. § 1.105-11(c)(2)(iii)). Overall, attorneys
believe that it is more difficult to make a case that distinctions between
management/non-management and salaried/hourly are reasonable and not violations
of Code sec. 105(h) than it is to make a case that union/non-union distinctions are not
violations of Code sec. 105(h). However, for any of these distinctions, the IRS would
likely apply a facts and circumstances analysis, giving weight to whether there is a
mixture of highly/non-highly compensated individuals in each group.
A-
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On December 23, 2010, the IRS issued Notice
2011-1 which postpones the implementation
of these nondiscrimination rules until further
guidance has been issued. We believe that the
rules will not apply until the plan year
following the time that the guidance is
issued. Plan sponsors will not be required to
pay excise taxes associated with
noncompliance until that time.
Here are some of the areas on which the IRS
has requested comments:
1.
Whether the rate of employer
contributions should be tested as a
nondiscriminatory benefit
2. Whether application of nondiscrimination
standards should be conducted on a
geographic basis
3. Guidance on safe harbor plan designs

Here are some of the areas on which the IRS
has requested comments:
1.
Whether the rate of employer
contributions should be tested as a
nondiscriminatory benefit
2. Whether application of nondiscrimination
standards should be conducted on a
geographic basis
3. Guidance on safe harbor plan designs
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4.
5.
6.
7.
The potential aggregation of substantially
similar coverage options for testing
purposes.
The application of the nondiscrimination
rules in 2014 when the individual mandate
takes effect
The use of the definition of HCE in Section
414(q) instead of the top 25%
Whether to disregard coverage provided to
HCE if paid on an after tax basis
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A.
An Unauthorized Entity is an insurance company that is not licensed by the Florida Office of
Insurance Regulation. Agents and Brokers have responsibility for conducting reasonable research to
ensure they are not writing policies or placing business with Unauthorized Entities. Lack of careful
screening can result in significant financial loss to Florida residents due to unpaid claims and/or theft
of premiums. Under Florida law Insurance Agents and Brokers can be held liable for unpaid claims.
Agents may be held liable when representing these Unauthorized Entities. It is the Agents and Brokers
responsibility to give fair and accurate information regarding the companies they represent. Any
question about the authorized status of a company can be checked by calling the Florida Department
of Financial Services at 1-877-693-5236 in Florida or 1-850-413-3089 outside the state of Florida.
We urge all agents and brokers to adhere to this admonition. The state of Florida has taken a very
strong position on the issue of Unauthorized Entities.

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