Self-insured plans in the midst of controlled group with other fully-insured plans - 105(h) non-discrimination rules?

[EGB]

Facts: Client has about 7,000 employees at 28 different companies, all in a controlled group. All but 1,000 employees are covered by fully-insured health/dental plan. The remaining 1,000 employees, who are all employed at one of the subs., have a choice among 3 self-insured health/dental plans. There are HCEs in both the fully-insured plan and the self-insured plans.

105(h)(8) states that the 105(h) discrimination rules apply on a controlled group basis. The benefits test in 105(h) states that any benefit provided to a HCE must be provided to a NHCE, and the regulations tell us that we look at both the type and value of benefits. The regulations also tell us that we can aggregate plans for purposes of satisfying the 105 non-discrimination tests. Further, the regulations tell us that we can offset benefits provided in other plans for purposes of satisfying the tests. There seems to be little guidance out there on how to practically apply these rules.

What if there are some components/benefits in the self-insured plans that are more favorable than the fully-insured plans? In comparing the plans, some of the benefits in the fully-insured plan are better than the self-insured plan(s) and vice-versa. Also, what is a "benefit"? What if a copay or deductible in the self-insured plan is lower than a copay or deductible in the fully-insured plan - is the amount of a copay/deductible a benefit? What if some surgery is covered in the self-insured plan(s) that is not covered in the fully-insured plan?

There is certainly no intent to discriminate and the differences in the plans, from a practical standpoint, seem that they should be ok. However, the benefits test in 105(h) is strict in that it says every benefit offered to HCEs has to be offered to NHCEs. So, if cosmetic surgery is covered in a self-insured plan (which would cover an HCE) and is not covered in the fully-insured plan at another subsidiary which has NHCEs participating, 105 is violated because there are NHCEs out there who cannot get this benefit? Surely this can't be the outcome . . .

Any thoughts on this would be appreciated!

[KIP KRAUS]

To make things simple, or maybe not so simple why not design one self-insured plan that combines all of the favorable benefits of both plans into one plan? Not knowing the design, experience or cost of either plan makes it difficult to suggestion anything other than one self-insured plan.

It doesn’t make sense to me to have 6,000 employees self-insured and 1,000 fully insured. Even if the 1,000 employees are in HMOs or PPOs you can still design one self-insured medical plan that should fit for all employees.

Why do you have this situation?

[Steve72]

I don't think you have a benefits test issue, in that 105 only applies to the fully insured portion of the plan. For purposes of the benefits test of 105(h), I do not think you compare the self insured plan to fully insured benefits. (The regs state that benefits offered "under a plan" may not discriminate. I read this to mean benefits under a self-insured plan.)

You state that there are HCEs and non-HCEs in both plans. What is the distinction being drawn? If you have an arrangement that would satisfy the eligibility test (see 1.105-11©(2)), I think you are OK from a discrimination standpoint.

That said, the 105(h) rules are FAR from clear (IMHO), and you could do worse than restructuring as Kip Kraus suggests.