There are various complex non-discrimination provisions that apply to self-funded health plans, cafeteria plans, HRAs, and health care and dependent care FSAs. These include IRC Section 105(h), IRC Section 125, and ACA. The purpose is to ensure that HCEs and Key Employees do not receive more favorable treatment or greater benefits than non-HCEs/Key Employees. As well, the definition of Key Employee and HCE can vary somewhat among the different code sections.
Do you have a one or more of the plans listed above? If yes, have you checked your email to see whether your TPA or broker/consultant sent you the results of the non-discrimination testing for your plans? Or, as many of us have done, did you file it because it was the end of the year, things were busy and besides, you don’t have to submit it to the IRS or the Dept of Labor?
If the latter, you should open it now and make sure that your plans have passed the discrimination tests. If not, then benefits that would otherwise have been non-taxable for your Highly Compensated and/or Key Employees may be taxable and reported on the employees’ W-2. (You should consult with your ERISA attorney and/or tax professional.)
Communications will need to be sent to the impacted individuals no doubt raising embarrassing questions as to why you didn’t tell the employees including your Corporate Officers sooner.
How do you avoid having to answer these embarrassing questions? There are steps that you can take now:
SAMPLE TESTING
Have your TPA or consultant/broker run sample discrimination test(s) for the current year as soon as possible. Ideally, sample testing should be done after the close of the annual enrollment period so that the affected employee(s) can adjust their elections. However, if you run the tests early in the plan year, any issues that turn up in the preliminary test, can be corrected for the current year. This may, again, raise some questions, but best to make the corrections as early as possible.
PLAN DESIGN
Review your plan design. In order to avoid discrimination issues, you may want to consider offering the same plans and employee cost share across the entire organization. If you want to offer additional benefits to executives, then consider separate fully-insured plans or perquisites that are not associated with self-funded health plans, cafeteria plans, etc.
COMMUNICATIONS
HCEs and Key Employees should be aware that there are legal limitations on what can be provided on a pre-tax basis. Communicating this during the annual enrollment period will help alleviate some of the pain if, after sample discrimination testing, elections have to be changed. And, don’t assume that all your HCEs will be in management or above. Highly paid non-exempt employees can move into the HCE category. The definition of an HCE includes employees that were paid $130,000 or more in the prior year and an employee whose salary is in the top 20% (25%) under Section 105(h)) of all employees.
If you passed your discrimination testing, congratulations. What are your next steps? Pretty much the same as for those that do not pass.
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- 1) Do the sample testing for the current plan year to make sure you continue to pass. The definitions of HCE and Key Employee change every year so passing last year does not guarantee passing this year. Further, new employees, salary changes, and promotions will impact this year’s testing.
- 2) Review your plan design to be that you are taking advantage of all the Safe Harbors and that your plans are meeting your employees’ needs. Companies spend a significant amount of money on employee benefits and administration. Employee benefits not only need to be aligned with company goals, but to be a valued part of employee compensation.
- 3) Finally, communications are just as important. Do your employees understand their benefits? You may provide excellent benefits, but if employees do not understand them, you are wasting money. And, while compliance is not going to be interesting to most employees, they do need to understand why you may need to revise some elections, as an example.
Compliance, benefits design, and communications are complex and time consuming. Trinity HR Consulting can provide support in these areas, to help you meet the challenges, ensure compliance, and help employees understand the value of the benefits that you provide.
Author: Kathleen Sholinsky, Senior Consultant
For more information, including how Trinity’s team of consultants may be able to help you with BENEFITS MANAGEMENT RELATED MATTERS, such as cost containment and employee education and communication:
- Email me at KathleenSholinsky@TrinityHR.net or Trinity at info@TrinityHR.net
- Visit our website at www.TrinityHR.net
- Call us at 865.905.1762 or Toll Free at 877.228.6810
You have HR challenges…Trinity has solutions!