Non-Discrimination

Frequently Asked Questions (FAQ)

What is a Highly Compensated Individual (HCI)?

An HCI refers to a highly compensated employee who meets one of the following criteria: is one of the five highest paid officers of a company, is a shareholder of more than 10 percent of a company's stock (with the application of attribution under section 318), or is one of the highest paid 25 percent of all of a company's employees. Discrimination in favor of a company's HCIs with respect to eligibility and benefits is prohibited under IRC §105(h) for self-insured plans. The new Health Care Reform law expanded the non-discrimination provisions to non-grandfathered fully insured plans, although recent IRS guidance has delayed the effective date for fully insured plans to comply.

Does the non-discrimination provision mean that a corporation cannot pay 100 percent for owners and management if it does not pay 100 percent for all employees?

The new Health Care Reform law notes that beginning for plan years on, or after, September 23, 2010, health plans satisfy the non-discrimination requirements if: (1) the plan does not discriminate in favor of highly compensated employees as to eligibility to participate based on certain criteria under the code; and (2) the benefits provided under the plan do not discriminate in favor of participants who are highly compensated employees. Recent IRS guidance has delayed the effective date for fully insured plans to comply.

What are the potential penalties for highly compensated individuals of fully-insured group health plans?

Rules similar to the non-discrimination rules for self-insured plans were originally effective January 1, 2011 for calendar year plans. However, IRS Notice 2011-1 issued in January 2011 provides that the non-discrimination provisions are not applicable until additional guidance is issued. The penalties for failure to comply with the non-discrimination provisions will also not apply until that time.

Can an employer have two different types of coverage so all employees have access to all plans but a certain (large) group of employees have higher employer contribution?

An employer will still want to ensure that plans do not discriminate in favor of highly compensated employees within the various classifications.

Can employers contribute more toward the premiums for non-highly compensated individuals?

The regulations do not specifically address whether required employee contributions (or corresponding employer contributions) must be uniform. However, it is implied that employers would need to contribute the same benefits amount to both non-highly compensated and highly compensated individuals.

An employer only offers group health insurance to key employees and pays 100 percent under the current plan. The employer wants to provide group health insurance to the other employees but does not want to pay 100 percent; however, he wants to continue paying 100 percent of the premium for key employees. Is the employer discriminating?

For self-insured plans, non-discrimination requirements are satisfied only if: (1) the plan does not discriminate in favor of highly compensated individuals (HCIs) as to eligibility to participate; and (2) the benefits provided under the plan do not discriminate in favor of participants who are highly compensated employees. Generally a plan does not meet the non-discrimination requirements unless all benefits provided to HCIs participating in the plan are provided to all other participants in the plan. An HCI is defined as:

• One of the five highest paid officers,
• A shareholder who owns (with the application of 318) more than 10 percent in value of stock of the employer, or
• Among the highest paid 25 percent of all employees.

Does non-discrimination take away a company's ability to class employees in different categories?

Under Health Care Reform, insured health plans (other then those that meet the grandfathered status requirement) must meet the nondiscrimination rules under Internal Revenue Code (Code) section 105(h)(2). These rules prohibit discrimination in favor of highly compensation individuals (HCIs) with respect to both the eligibility to participate in the plan, as well as the benefits received under the plan. All benefits provided to HCIs who are participating in the plan must also be provided to other participants in the plan. (Individuals will be considered an HCI if they are: one of the five highest paid officers of a company; a shareholder of more than 10 percent of the company's shares (attribution rules apply); or one of the highest paid 25 percent of all the company's employees.)

Can an employer have multiple medical plans with different waiting periods if they do not have different classes of employees? (For example, the employer has Aetna and Kaiser medical insurance. The Aetna policy has a waiting period of 60 days and the Kaiser policy has a waiting period of 90 days.)

The non-discrimination rules are not clearly outlined in the guidance provided in Internal Revenue Code (Code) Section 105(h). We cannot comment on a business's specific plan design; contact your attorney or benefits advisor to determine if this would be allowable.

Can an employer have different waiting periods by class or site location?

Offering different waiting periods could affect the Eligibility Test as well as the Benefits Test. Contact your CPA or benefits attorney for more specific information.

Which test would an employer use for discrimination testing for waiting period and contributions?

There are two components to the new non-discrimination requirements for fully insured plans that a plan must pass: (1) the Eligibility component and (2) the Benefits component.

a. The plan must benefit at least 70 percent of all employees.

Example: Company has 100 employees; 75 are participating (i.e. benefiting) in the plan. Since at least 70 percent of all employees are benefiting, this plan passes the test.

OR

b. b. A total of 80 percent of the 70 percent that would be eligible are benefiting from the plan.

Example: There are 100 employees. 75 are eligible but only 60 are participating. In this example, you have more than 70 percent eligible for the plan and since 60 employees are participating (which is greater than 80 percent benefiting of the 70 percent that is eligible), this plan passes the test.

(2) Benefits

c. All benefits provided to highly compensated employees (HCIs) who are participants in the plan must be provided to all other participants. Also, all the benefits available for the dependents of HCIs must be available on the same basis as dependents of all other participants. The regulations do not specifically address whether required employee contributions must be uniform (or corresponding employer contributions); however it is implied, and based on the spirit of the law, that participant contributions be considered under the Benefits Test and not discriminate in favor of HCIs. Recent IRS guidance has delayed the effective date for fully insured plans to comply.

Is it possible to avoid discrimination testing by offering a cafeteria plan?

An eligible small employer is provided with a safe harbor from cafeteria plan non-discrimination requirements for specified, qualified benefits offered under the plan, if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements. To take advantage of the safe harbor, these requirements must be written into the cafeteria plan documentation (i.e., Plan Document and Summary Plan Description). If a fully insured health plan has grandfathered status, that plan would be exempt from the new non-discrimination requirements under Section 105(h) as outlined in the new Health Care Reform laws. If the plan is not grandfathered and not part of a simple cafeteria plan, it would be subject to the non-discrimination requirements. Recent IRS guidance has delayed the effective date for fully insured plans to comply with the new nondiscrimination requirements.

An employer provides varying levels of life insurance depending upon the salary range of employees. Is this type of arrangement considered discriminatory?

Life insurance is not included in Health Care Reform, and therefore is not affected by the non-discrimination provisions of the reform; however, group life insurance offerings by employers are subject to non-discrimination testing. If an employer bases the amount of life insurance coverage on salary, the benefit level is not equal throughout the workforce. In this scenario, key employees would be in the highest bracket and receiving a higher value policy than an employee in a lower salary bracket. This type of plan is considered to be discriminatory. A tax advisor can provide guidance and specific details.

Is it discriminatory if an employer pays 100 percent of the premium for salaried employees and 50 percent of the premium for the remaining hourly employees?

Providing different coverage levels for different classes may be considered discriminatory, as the higher-paid employees would be paying less for their coverage than the lower-paid employees. This aspect of discrimination is not addressed directly in the Health Care Reform law but can found be in correlating tax law (Section 1.105-11(c) and Section 105(h) of the Tax Code). Contact your tax advisor or benefits attorney for more specific guidance.

Paychex Insurance Agency Can Help

Paychex Insurance Agency is a full-service organization ready to provide guidance about small business tax credits and other provisions of Health Care Reform. We help you:

• Select an insurance plan if you don't currently offer health coverage.
• Report premium amounts paid (for Paychex Insurance Agency's Insurance Payment Service [IPS] client).
• Stay up to date as laws are clarified, regulations are developed, and guidance becomes available.

Health Care Reform Updates

With access to legislative and regulatory specialists in Washington, D.C. and expert, in-house sources of legal and compliance guidance, Paychex Insurance Agency is your source for Health Care Reform knowledge, tools, and resources.

Whether you're looking for a Business Owner Policy, Workers' Compensation insurance or group health and life insurance, Paychex Insurance Agency offers flexible, scalable insurance solutions for you, your business and your employees. To learn more about how we can meet your insurance needs, call 877-393-8868 or have an agent call you.

The Department of Health and Human Services and the Internal Revenue Service (IRS) continue to provide specifics and guidance on the Health Care Reform Act. Paychex will monitor these regulatory developments and provide updates as appropriate.

The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. It is provided for informational purposes only. If you require legal or accounting advice, or need other professional assistance, you should always consult your licensed attorney, accountant, or other federally licensed tax professional to discuss your particular facts, circumstances, and business needs.

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