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Is this common and, if so, is it permissible?


401 Chaos
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Sorry, I'm not a health and welfare plan expert but I've come across a couple of situations recently that have me confused. 

In both, there has been a clear controlled group with at least 2 different companies set up and with different welfare benefits at the different companies.  In the first group, they offered the same health plan and 401(k) plan across different companies but the company with all the execs also had group life insurance, vision, disability, etc., some of which was partially paid through a group cafeteria plan.  Other companies in the group, however, did not offer welfare benefits beyond the group health but had folks, of course, participating in the cafeteria plan for health insurance premiums. 

In the second group, they offered a robust, highly-subsidized health plan to the one company with all the executives and longer term / permanent employees along with a full suite of other welfare plans.  The other company within the group, however, has only bare-bones group health plan with less employer contribution and no other welfare benefits.  Apparently that company often employees individuals on a full-time but less long-term / permanent basis.  Some individuals have been there years though.  And they do get to participate in the same group 401(k) plan (which is how I came to this issue) but not at all the same welfare plans (including no ability to participate in the health FSA under the cafeteria plan that the parent company offers).

Assuming the different medical plans at the two companies both pass ACA muster (which is probably questionable on affordability), surely these arrangements cannot pass the Section 125 tests?  When I asked about 125 testing though they all look like I'm from another planet.  (That doesn't surprise me as I know that testing often gets ignored but I'm curious how brokers are setting up such disparate benefit offerings without a concern over various testing issues.)  Am I missing something?  Thanks.

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@401 Chaos Which part of the 125 NDT are you concerned about?

The uniform election component of the contributions and benefits test is the most commonly addressed piece on that front.  In that case, it simply prohibits a larger employer contribution for an HCP than made available to a non-HCP eligible for the same plan option.  If I understand the situation correctly, that's not going to be a concern here because there are different plan options at issue.

Also, most interpret the rules the permit the employer to create separate cafeteria plans with different contribution strategies for each division within a controlled group. I've written about that here if you're interseted: https://www.theabdteam.com/blog/nondiscrimination-rules-for-different-health-plan-contribution-structures-2/

What they should be worried about is the indefinitely delayed set of fully insured plan nondiscrim rules from the ACA.  Those would likely be a problem here if they ever see the light of day.  Summary here: https://www.theabdteam.com/blog/cadillac-tax-fully-repealed/

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Thanks, Brian.   This is very helpful.  In response to your question, I'm not well versed in 125 NDT but I guess my main answer would be the benefits availability aspect.  Putting aside the potential for separate 125 plans because there is only one plan in these cases, it seems discriminatory on its face that all the HCPs in the group (along with a lot of non-HCPs) are permitted to use the plan to pay for benefits (dental, vision, life insurance, disability) that a large number of non-HCPs cannot participate in at all, even paying all premiums on an after-tax basis.  And elect to participate in the health fsa and DCAP under the plan that is not made available to employees in the sub.  That's putting aside too the fact that the sub employees don't have access to the better health plan (with greater employer contributions),  In my quick reading of the 125 testing in the EBIA manuals, it didn't seem that some employees (including all the HCPs) should be able to elect more and better benefits than others (even though they are permitted to participate in certain aspects of the 125 plan).  Again, I know very little about the intricacies of the testing so just trying to understand.

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@401 Chaos I'm with you on that part.  Putting aside the plan design insanity of not letting certain employees make pre-tax contributions for the employee-share of the premium (which benefits both the employee and employer), I agree you have a potential eligibility test issue there.  I think you'd have to look to whether that's a reasonable classification based on objective business criteria, and then even so if the plan can still meet the safe harbor or unsafe harbor percentage test for the ration of highs to non-highs participating.

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  • 4 weeks later...

Brian (or others),

I'm back with some additional information and follow up questions. To refresh and provide a bit more information, for one group above there is a clear brother sister controlled group with 2 separate companies (and separate EINs) but with virtually identical ownership among small group of owners.  In one company (the larger of the two) there are the primary officers / executives plus a mix of some other highly comped and non-highly comped employees.  They have the ability to participate in a fulsome fully insured group health plan plus dental, vision, group life insurance, AD&D, LTD, and health FSA and DCAP.  Employees can elect to pay their share of premiums through a cafeteria plan. 

The second company in the controlled group (smaller of the two) has some highly comped employees as well but fewer than company 1 along with lots of nonhighly comped.  I do not have the exact breakdown of HCEs to NHCEs in either company.  The second company offers all its employees a bare-bones group health plan but no other welfare benefits.  They have allowed employees to pay premiums for the bare-bones health plan on a pre-tax basis.  Originally they thought they were permitting pre-tax payments under the cafeteria plan sponsored by company 1 but now say that isn't the case and intent was to offer through a separate POP cafeteria plan for just Company 2.  (They don't seem to have an actual POP plan document . . . yet.)

In any event, they are wondering if this design and the maintenance of separate cafeteria plans among the separate companies could work from a testing perspective.  I note from the article linked above there is a note that the ability to maintain separate plans is "not entirely clear" from the proposed regs. which is consistent with what I've seen elsewhere.  In this case, I suppose they might also get the benefit of the safe harbor testing for the POP plan if they can maintain separate plans.  Everybody at that Company 2 gets to participate in the one health plan with equal employer contributions so there isn't anything on it's face that suggests the cafeteria plan arrangement standing alone poses any problem.

I just cannot seem to square this result though with Company 1 being able to maintain a different cafeteria plan that allows employees (albeit a mix of highly and non-highly) pay for a host of other plans pre-tax that aren't even offered to employees of Company 2.  Including participation in the Health FSA and DCAP.  As with Company 2, everybody in their Company 1 plan (highly and non-highly) participate on an equal footing and receive equal rates / contributions so there is nothing within the operation of the plan standing alone that suggests a problem.  It's just the huge disparity between the benefits offered through the cafeteria plan at Company 1 versus Company 2 that has me concerned.  For example, while the Company 1 Plan covers a broad mix of Company 1 highly and non-highly employees, it also excludes from participation in a number of component benefits (group life, health FSA, DCAP, etc.) that are not available at all to a large number of non-highly (and a few highly) Company 2 employees. 

A few questions

  1. Is there anything obvious in the set up with the two plan approach noted here that would suggest this isn't possible at all--like having a cafeteria plan with an FSA in one company of the controlled group but not the other?
  2. Perhaps all this turns on testing and mix of highly and non-highly in both companies but, if that's the case, guess I wonder why since some of the guidance suggests this really turns more on setting up different plans at a different, separate entities than the make-up of the work force.
  3. Brian, perhaps ABD performs this sort of work but where can the controlled group at issue in my case go to get definitive guidance on the testing and compliance of the separate plans for separate companies approach assuming certain reasonable assumptions.  Current 125 provider suggests they cannot (or will not) provide testing guidance on which clients may rely when dealing with multiple plans within a controlled group.  I get some of the regs are not clear and are proposed, etc. but is there a group that can run mock tests and advise on approach provided certain aspects of the regs are interpreted in a stated way?

Thanks for any assistance anyone can provide.

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@401 Chaos I'd suggest finding one of the FSA vendors that can perform the NDT here.  My guess is that one of the major vendors in this space could handle it.  That might be something you want to arrange with outside ERISA counsel to have attorney-client privilege to protect the confidentiality of the results.

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Thanks.  Understood.  Not looking for definitive or detailed analysis here but just hoping for a take on whether something was so out of bounds as to present an obvious issue.  They have a large regional FSA vendor already but are not getting warm fuzzies with their testing prowess.

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