NondiscriminationTesting: in a funded self-insured medical plan, in w

[Moe Howard]

Employer has a funded self-insured medical plan for its employees. Each employee has $40 withheld from their monthy paychecks (on a pretax basis) which helps provide the employer with funds to pay the participants medical claims.

It appears to me that there two catergories of monies in this:

1. Pretax withholdings from employees ($40 each month)

2. $Amount of claims that employer pays to medical providers.

__________________________

So, now it comes time to do the Sec 125 "nondiscrimination" BENEFITS and CONTRIBUTION and CONCENTRATION testing.

My Question:

a) What does benefits mean ? (It's got to be either 1 or 2 above).

b) What does contribution mean ? (It's got to be either 1 or 2 above).

I'm confused as heck. I wonder why Sec 125 does not define the words "benefits" or "contributions" when it discusses nondiscrimination testing for cafeteria plans ?

[papogi]

Contributions are supposed to be the employees' pre-tax payroll deductions (i.e., monies that fund the plan). Benefits are supposed to mean the payouts from the plan.

What a strange plan design. They should simply raise the pre-tax payroll deductions attached to each plan and coverage level a set percentage. This will still give the employer the funds, but it will prevent the single coverage employees from footing a greater percentage of claims than the family coverage employees.

[Moe Howard]

papogi, Thanks.

How about a few more questions:

1) What about if the above plan was fully-insured (Blue Cross). "contributions" would still be the pretax withholding, but what would "benefits" be ??

Would it be the premiums paid by the plan? Or would it be the premiums paid by the plan - less the pretax withholdings ?

2) When does the nondiscrimination testing have to be done on a cafeteria plan ? (Is it only as of the last day of the plan year end date ? ....What if the plan did not discriminate as to eligibility during the year, but then on the last day of the year an eligibilty infraction existed ... would it be deemed to have failed the eligibility nondiscrimination test for the whole year ?)

I have not been able to find the answer to any of the above questions in the text of IRC 125.

THANKS

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[papogi]

Your reply helped me out, so I can clarify my answer. Often, people talk about employee contributions and how these should be distributed so as to remain non-discriminatory. Your follow up lets me know better what you were looking for. 125© says that a flex plan cannot discriminate in favor of highly compensated participants with regard to contributions and benefits. In this case, contributions are employer contributions to non-taxable benefits and employer contributions to total benefits (this would include the premiums to Blue Cross). The employee contributions are not considered employer contributions. Even though 125 essentially turns employee payroll deductions into employer contributions, my understanding is that these funds are still employee contributions for non-discrimination purposes, and should be subtracted from the employer contributions. Actually, if the percentage of premium allocable to employee pre-tax contributions is the same for each coverage level, then the calculation comes out the same whether you subtract the employee contributions or not. Since your case involves a flat $40 from each person, it will affect calculations. Again, my understanding is that this $40 needs to be subtracted from the employer's contribution. Concerning benefits, each participant must have an equal opportunity to select non-taxable benefits, and the actual selection of benefits cannot be discriminatory, meaning highly compensated participants must not select non-taxable benefits significantly more than other participants. There is very little IRS guidance on the specifics of the benefits test. You should be safe as long as non-taxable benefits are offered equally to all participants, and the plan passes eligibility tests.

A plan is really not supposed to discriminate in favor of highly compensated participants at any time during the year. If the plan is discriminatory, all highly compensated participants will suffer tax consequences. The non-highly compensated participants are still protected.