Health Plan Nondiscrimination Rules

[Guest H.J. Simpson]

I have a client who maintains a self-insured health plan for its employees. Because of high turnover among a particular group of workers who are generally not highly compensated, the client wants to delay eligibility for those employees until 90 days after hire while retaining immediate eligibility for all other classifications of employees. Can the client do this with running afoul of the 105(h) benefits and eligibility tests?

[Guest taylorjeff]

This is a late reply but since no one else has relpied, I will. There are two tests under section 105h. One relates to eligibility, one to benefits paid to participants. Before running the eligibility test, the employer may exclude 1) employees with less than 3 years of service, 2) employees less than age 25, 3) part-time & seasonal, 4) collectively bargained employees, and 5) certain non-resident alien employees. Of the employees left, the plan does not discriminate as too eligibility as long as 70% are eligible to participate and of those, at least 80% do participate. The plan will meet the benefits portion of the testing as long as the benefits provided for the highly compensated individuals are also provided for the other participants.

[Kirk Maldonado]

My recollection is that the regulations say that this arrangement does not work.

[Guest H.J. Simpson]

Since I posted this question I have spoken with IRS personnel who confirmed that such an arrangement would violate the benefits test. The client could create a separate health plan for this group of employees, and both plans would pass the benefits test; however, both plans would still need to meet the eligibility test (which, for the plan that exists currently, would be made more difficult by shifting many of the NHCEs to another plan).