Discriminatory MERP

[Guest Sieve]

Does anyone know how operational discrimination is measured in a self-insured medical expense reimbursement plan under IRC Section 105(h)? Is it based simply on reimbursements made to HCEs as compared to the highest NHCE, or the average of all NHCEs? What if it's a small corp, and the NHCEs happen to be healthy and have no claims, while the owner does have claims? The regs are not helpful.

[J Simmons]

Hi, Larry,

The closest to a concrete fact that the IRS has given, to my knowledge, on what is meant by Treas Reg §1.105-11©(3)(ii) regards setting the EE contributions so high that as a practical matter only the upper paid can effectively pay and continue coverage. See Letter Ruling 8328065, April 13, 1983

Such situation could arise if the contributions required of a survivor result in the survivors of highly compensated individuals being able to continue coverage in a manner that discriminates in their favor, as opposed to the survivors of other participants.

Letter Ruling 8411050, December 13, 1983: only mention of operational discrimination is in same paragraph re required EE contributions.

Letter Ruling 8345065, August 10, 1983

Such failure may result, for example, by operation of section J of the Eligibility Resolutions. Section J may result in discrimination in benefits if, for example, highly compensated employees are able to extend benefits in a manner that discriminates in their favor, as opposed to other employees.

But compare Letter Ruling 8328077, April 13, 1983 where there is no mention of EE contributions, but warns there could be operational discrimination, and Letter Ruling 8134129, May 29, 1981 (EE contributions and operational discrimination possibility both mentioned, but not 'in the same breath' nor the discrimination expressly tied to EE contributions).