Self-Insured Plan Discrimination Issue

[Guest prairielaw]

I am an employment law practitioner with a benefits question . . . . If a HCE retires while still highly compensated, does his or her highly compensated status follow him or her into retirement. In other words, if a retired former HCE receives discriminatory benefits, does that render the plan discriminatory? Are the excess benefits then taxable to the retiree-former HCE?

[Guest b2kates]

I am shooting from the hip with this answer, but it is my recollection that HCE status follows into retirement.

Look to IRC 105(h) for impact of discrimination on self- insured plans.

[Kirk Maldonado]

The applicable regulations are 1.105-11.

[KJohnson]

Also note that retirees are a separate group under the regs. So, even if you could pass 105(h) eligiblity if the retiree was "lumped in" with the actives, you have to look at retirees as an entirely separate group.

[Steve72]

Aggressive interpretation follows:

Note that there are two tests under 105(h): Eligibility and benefits. A strict reading of the regs seems to indicate that only the benefits test is applicable to retirees (meaning that you just need to ensure that the same benefits are available to all retired participants, and technically, you could discriminate on the basis of eligibility.

[Guest prairielaw]

Would taxing the imputed premiums to the HCE retirees allow a company to avoid taxing the excess benefits to the HCE retirees?

[KJohnson]

At an ABA conference the IRS has said that this works with a self-insured plan as to paying COBRA premiums for the executive.

§105– Health and Medical Benefits

It is not unusual for an employer to pay COBRA premiums for former employees for a limited period of time. Often this is done as part of a RIF or a termination agreement with a particular employee. If the plan is self-insured and some of the former employees were highly compensated individuals (“HCIs”), does this raise an eligibility discrimination issue, a benefits discrimination issue, both or neither under § 105(h)?

Proposed response: It raises neither an eligibility discrimination issue nor a benefits

discrimination issue as long as the premiums are treated as taxable income to the former employees, since in that case the employer’s payment of the premiums is not an extension ofcoverage or benefits under the plan itself.

IRS response: The IRS agrees with the proposed answer

Interestingly, at this same conference there was also a response going to Steve 72's point to some extent. It seems that as for your eligibility testing, they are taking the position that if you include one fomer employee you have to include all former employees in your 105(h) eligibility computation. It would seem it would be difficult to pass on tis basis:

6. §105 – Health and Medical Benefits

It is not unusual for former employees to be allowed to continue to participate in their employer’s health plan for a limited period of time as if they were still active employees. Often this is done as part of a RIF or a termination agreement with a particular employee. If the plan is self-insured and some of the former employees were highly compensated individuals (“HCIs”), does this raise an eligibility discrimination issue, a benefits discrimination issue, both or neither under § 105(h)?

Proposed response: It raises an eligibility discrimination issue, not a benefits discrimination issue. Thus, § 105(h) does not prohibit such an extension of coverage as long as it does not cause the plan to violate § 105(h)(2)(A) (requirement that plan not discriminate in favor of HCIs as to eligibility to participate).

IRS response: The IRS agrees with the proposed answer, but note that providing a benefit to former employees will require that all former employees must be considered in testing for eligibility.

[Randy Watson]

Aggressive interpretation follows:

Note that there are two tests under 105(h): Eligibility and benefits. A strict reading of the regs seems to indicate that only the benefits test is applicable to retirees (meaning that you just need to ensure that the same benefits are available to all retired participants, and technically, you could discriminate on the basis of eligibility.

Just how agressive is this? Has anyone taken this position in front of the service?

[namealreadyinuse]

Has anyone taken this position in front of the service?

I was under the impression that 105(h) issues don't come up before the Service. Has anyone really seen ANY enforcement/exams of these rules?