105(h) and Governmental Plans

[IRC401]

Does IRC 105(h) apply to governmental plans?

I can't find an exception, but I have a diificult time understanding why Congress would want to apply 105(h) to governments.

[Kirk Maldonado]

I'm not aware of any exemption either.

There is another way of looking at the situation. Why should a governmental entity be allowed to provide discriminatory benefits? What is the compelling reason to allow them to discriminate in a way that is unavailable to private employers?

[IRC401]

I'm not aware of any exemption either.

There is another way of looking at the situation. Why should a governmental entity be allowed to provide discriminatory benefits? What is the compelling reason to allow them to discriminate in a way that is unavailable to private employers?

I can think of two reasons. You decide how compelling they are. First, how does one run a test on a state government? I'm guessing that somewhere out there is a state university with a self-insured medical plan that hasn't given the slightest thought to 105(h).

Second, what about Congress? I assume that Congress' medical program is self-insured. (Why have insurance if you can print money, unless you want to direct an insurance commission to some politician's relative or contributor?) Is it possible that Senators have a taxable retiree medical benefit that creates a 409A problem?

[Don Levit]

Folks:

I was under the impression that a lot of the provisions that would come under ERISA, instead, are applied ti gfovernments through the PHS Act.

In fact, as I recall, a lot of the provisions for ERISA apply to this act.

Don Levit

[Guest mjb]

Why should govt be subject to to 105h rules when they are not subject to non discrimination and participation rules for qualified plans?

what govt ees are HCEs in a 105h plans?

Finally do the particpation rules of 105h apply to govt employers if they are not subject to the rules of IRC 410?

[Kirk Maldonado]

I seem to recall that Congress didn't exempt governmental plans from the nondiscrimination rules of the IRC; that was done by IRS fiat.

[Guest mjb]

Its been statutory since 1997. See IRC 401(a)(5)(G).

[Don Levit]

According to the Nov. 2005 newsletter from Reish, Luftman, Reicher, & Cohen, "Government plans are not subject to ERISA. The rules governing such plans are found in state law as well as the rules under the Internal revenue Code. The Taxpayer Relief Act of 1997 permanently exempted government plans from the rules of the following Code sections: 401(a)(3), 401(a)(4), 401(a)(26), 401(k),401(m),and 410(a) and (b). This means a government plan isn't subject to the rules that prevent discrimination in favor of the highly compensated employees in the plan.

However, according to the newsletter, state law could apply.

I assume that means state law which does not conflict with federal law, including the code sections which were permanently exempted.

Don Levit

[Guest AMP]

I agree with IRC401 and Kirk that there is no statutory or regulatory exemption under Code Section 105(h) for governmental plans. Any exemption would have to be targeted only at Code Section 105(h) and not to Code Section 105 in general so that benefits received by non-highly comp governmental employees from the employer's group health plan would still be excluded from income by Code Section 105(b). But I've never seen an exemption for Section 105(h).

The TRA 97 statutory exemption from the nondiscrimination rules applicable to qualified retirement benefit plans is irrelevant with respect to self-insured health plans. The participation rules in Code Section 410(b) are not explicitly incorporated into Code Section 105(h), just referred to indirectly ("nondiscriminatory classification" test). Exemption from ERISA is also irrelevant because this is strictly a Code provision; ERISA does not impose any nondiscrimination requirements on welfare benefit plans.

That said, however, while I agree with IRC401 that testing a governmental entity's self-insured health plan would be a nightmare, I don't recall impracticality or impossibility of testing ever preventing a nondiscrimination requirement from being included in the Code. We always advise our governmental clients that their self-insured health plans are subject to the nondiscrimination requirements of Code Section 105(h).