HCR Model Notices

IRS Section 105 non-discrimination rules will apply to fully-insured plans beginning with renewal dates following September 23, 2010. All group health plans, unless grandfathered, should be evaluated to ensure nondiscrimination requirements are met in compliance with this requirement. The non-discrimination rules require that a plan not discriminate in favor of highly compensated employees (HCEs) with regard to eligibility, contributions and benefits. The IRS generally defines HCEs as those who are:

To ensure these requirements are met, there are specific tests which employers will be required to conduct.

Eligibility Test
To avoid eligibility discrimination, the plan must benefit 70% or more of all employees, or 80% or more of all eligible employees if at least 70% of all employees are eligible to benefit under the plan. Generally, a plan will satisfy this requirement if all benefits available to HCEs are also available to all other employees.

Contributions and Benefits Test
The plan cannot discriminate in favor of HCEs with regard to the availability and use of benefits, meaning that participants must be given equal opportunity to select benefits, contributions must be made in a non-discriminatory manner, and benefits must be utilized proportionately. Therefore, the plan cannot discriminate in actual operation in addition to not discriminating in its design.

Key Employee Concentration Test
The benefits provided to key employees cannot exceed 25% of the total of benefits provided to all employees under the plan. A key employee is an officer whose compensation exceeds $140,000, a more than 5% owner of the company, or a greater than 1% owner of the company with compensation greater than $150,000.

FAILING THE NON-DISCRIMINATION TEST
If a plan fails any of the non-discrimination tests, HCEs/key employees may be taxed on the benefits received; other plan participants are not affected.

CONDUCTING NON-DISCRIMINATION TESTS
Non-discrimination tests can be conducted before the start of the plan year or at any time during the plan year. However, keeping these requirements in mind when establishing how a plan will be designed and administered will help avoid headaches later. The plan can be established to not discriminate from the beginning by ensuring the eligibility and contribution requirements are consistent for all employees. When employees make their elections, the overall employee census and employee elections can be reviewed to ensure the benefits and key employee concentration requirements are actually met. Failures can be corrected early to avoid making any benefits taxable.

The information contained herein is for informational purposes only and is not intended as legal or tax advice.