Contribution and Benefits Test

[Guest jevans3013]

My client has asked me to research the scenario where if you make over X amount, you pay more towards the premium for medical coverage. For example, if you make over 75k, you will pay $200 toward the premium instead of $100 for employees who make under 75K. Will this work with the Contribution and Benefits portion of the 125 discrim testing? I have run the Key employee concentration test and it appears that it will pass. I am concerned about the contributions and benefits test however because it appears that the only differences in EE contributions are for different tier elections or geographical differences?

Does anyone have any plans like this and if so, how do you get around the C&B portion of the test?

Thanks in advance for your help.

[Guest jevans3013]

Any thoughts?

[J Simmons]

From your scenario, it appears there are differences in employee contributions beyond any for different tier elections or geographical differences. Some employees will be paying $100 while others must pay $200.

Let's look at it from the perspective of what the employer pays rather than the employee. Suppose the cost in premiums of health coverage is $500 per employee.

For everyone under your scenario, the employer is paying $300. That's one benefit structure. That passes. At this point in our analysis, each employee must pay the other $200.

For just those earning under $75k, the employer is paying another $100. That's a second benefits structure. That too should pass. It is only discrimination that would favor the highly compensated participants that must be avoided. Prop Treas Reg sec 1.125-7©. Basically, the highly compensated participants are those eligible employees who are officers, more than 5% shareholder, and those, for 2008, who earned over $100,000 in 2007 (or over $105,000 in 2008 if 2008 is their first year).

I suppose it's possible that you could have employee demographics with a concentration of people earning $75k-$100k (or -$105k) but not being an officer or more than 5% shareholder, coupled with an unusually high number of officers and employees that own more than 5% of the company but earn under $75k. If you have this weird demographic, then you may have a problem with the contributions and benefits test. It is unlikely however.

[Guest jevans3013]

Thank you for your reply.

Would the plan have problems passing the Availability Standard because the HCE group (and employees in the 75k-105k range) are able to increase their pre-tax contributions more than the under 75k group.

I guess my problem with this design is it gives HCEs the opportunity to lower their taxable income more so than non-HCE's.

[J Simmons]

Focusing on nondiscrimination as to eligibility (Prop Treas Reg § 1.125-7(b)) rather than the nondiscrimination as to contributions and benefits (Prop Treas Reg § 1.125-7©), the examples in the proposed regulations all pose the reverse of your situation (one is neutral on the cost and benefit to employees). Prop Treas Reg § 1.125-7(b)(3)(iv), Examples 2, 3 and 4 each sketch out problematic situations where the cafeteria plan 'cost' for the same coverage is lower for the highly compensated or the highly compensated get a richer coverage.

That the highly compensated might be impermissibly favored under the cafeteria plan because they may elect more of the premium cost because the ER pays less of the premium cost for them than for non-highly compensated is not suggested in the fact patterns of those Examples 2, 3 and 4.

Note, the ER could side-step the question by cutting the payroll of each of the EEs whose income is at least $75k by $100 a month and pay all but $100 of the premiums for all employees.

Or, the ER could boost the payroll to EEs who earn less than $75k by $100 a month, and pay all but $200 of the premiums for all employees.

Either of these would treat all EEs the same. Prop Treas Reg § 1.125-7(b)(3)(iv), Example 1.

The true uptake of the difference you describe is that the $100/mo/EE in question is that those earning under $75k have no choice of cash (or other cafeteria plan benefit) in lieu of it being applied to health insurance premiums while those earning at least $75k do have that choice.