Fully insured group health plans are not subject to the employee discrimination plans required for employers using a self-funded plan.
As small employers turn to level-funding, a form of self-funding, they need to incorporate the self-funded non-discrimination requirements under Code Section 105(h). These rules apply to level / self-funded group medical plans, as well as most health flexible spending accounts (health FSAs) and health reimbursement arrangements (HRAs).
Under Section 105(h), a self-insured health plan cannot discriminate in favor of highly compensated employees with respect to eligibility or benefits. If a self-insured health plan is discriminatory, highly compensated employees will be taxed on their “excess reimbursements.”
For purposes of Section 105(h) testing, a highly compensated employees means an individual who is:
- One of the five highest-paid officers
- A shareholder who owns more than 10% in value of the stock of the employers
- Among the highest-paid 25% of all employees
Employers and/or their benefits agent should conduct an eligibility test which analyzes whether the plan provides highly compensated employees with better benefits, either in terms of how the plan is designed or how it operates. A health plan does not satisfy Section 105(h) nondiscrimination testing unless all the benefits provided to participants who are highly compensated employees are provided for all other participants.
Compliance Overview, HR360, is not intended to be legal advice, readers should contact legal counsel for legal advice.