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Discrimination in 125 Benefits


Guest BWORC
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I have a client who requires its HCEs to pay a greater share of the group health insurance plan premium that it requires of NHCEs. The HCEs want to be able to pay their share of the premium with pre-tax money through the cafeteria plan. They are told that this results in discrimination.

When looked at in isolation, there is greater use of the 125 plan and a greater benefit to the HCEs than NHCEs under these facts. However, it seems like a crazy result when they are paying more for the premium than the NHCEs.

I've looked at the regs and I must say I don't understand whether the client can take account of the health insurance premium differential when it measures discrimination in the 125 plan.

Help, please.

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Yes. Everyone could pay for the entire premium with a combination of employer contribution and 125 salary reduction so that the entire cost is paid pre-tax.

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If that is true, the employer would have to have some odd demographic/economic circumstances to be discriminatory based on utilization (which is only one part of the testing). With a small organization it migth be more likely to happen, but you don't isolate just the premium differential for examiniation. The higher employee share of the cost of the covereage is helpful for other discrimination concerns. See if section 125(g) (2) is helpful.

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I thought that 125(g)(2) seemed clear enough, on its face, in that it permits you to include both the health insurance premium paid by the company and the amount that was the responsibility of the employee and paid through the POP plan. But I found myself uncertain, wondering which plan the statute means when it says "contributions under the plan on behalf of each participant include an amount which equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated," I have had trouble parsing that language. The client would like every participant in the plan to have all of his or her share of the group health plan premium payable through the 125 plan. The TPA has said that would result in a discriminatory 125 plan because the benefits payable to the highly compensated would be greater than those paid to the rest. This results, of course, because the highly paid are given a smaller employer contribution for the premium.

It seems to me that 125(g)(2)(A)(i) would mean that their plan is not discriminatory. I just wish I were more confident that I understood the language in that subsection.

What do you think, QDROphile?

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Can you conform the formalities of the plan with the terminolgy of the statute to make you feel better? In other words, can you design the arragement to have the entire cost of the premium be borne by the employees and have the amount of the employer cost of premium be a contribution to the plan? Would that freak everyone out even though it changes nothing except to provide a clear track of employer contributions through the plan?

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