Discrimination testing under self-insured medical plan; OK to count both W-2 and 1099 pay in determining the "highest paid 25 percent of all employees"?

[Guest abrandw]

For purposes of testing whether a self-insured medical plan is discriminatory, Section 105(h)(5) of the Code provides that the term "highly compensated individual" includes an individual who is "among the highest paid 25 percent of all employees." We are trying to structure a plan which requires employee contributions based on the employee's pay; the higher the pay, the larger the contribution. Some of the participants, however, receive a small amount of W-2 pay and substantial 1099 pay. In identifying the "highest paid" employees, can we take into account both W-2 and 1099 pay? If only W-2 pay is considered, then the individuals in question will not be among the "highest paid."

[oriecat]

I know this isn't your question, but are you aware that filing a W-2 and a 1099 on the same individual is a big red flag to the IRS that employment taxes are being evaded? You might need to evaluate these employees and make sure they are being properly classified.