Nondiscrimination: Higher Employer Contributions for HCEs

[JRG]

We have a client who has a POP plan in which the premiums are $4500 (single). The employer pays $3000 of the premium for NCHEs and $3750 for HCEs (officers). Thus, NHCEs can elect to pay $1500 pretax and HCEs can elect to pay $750 pretax. Does anyone know how this would pass Code 125 nondiscrimination testing?

[leevena]

Difficult to say without more information. All you have given us is the contribution amounts per unit. What is needed is an explanation of the total premium generated for each category along with the size of each group. For example, if you had 10 HCE's and 3 NHCE's in your group, good chance it will fail. If however you had 10 HCE's and 200 NHCE's there is a good chance it will not fail. Also, keep in mind you are testing for eligibility and contributions/benefits.

[GMK]

I agree with leevena.

As a reference, this summary may help:

http://www.mhmresources.com/doc/FF/MHMR-FF0708a.pdf

including the special treatment of POP plans (bottom of page 3).

[JRG]

Thanks,

From your link on page 3: "Even if the same accident and health plan is offered to all employees, but unequal premium contribution amounts are established for each group, the cafeteria plan would not pass the eligibility test." The eligibility test is what POP plans have to pass for the safe harbor.

So how could it possibly pass eligibility even if it has 10 HCEs and 200 NHCEs? (I'm not saying leevena is wrong, I would just like to understand the reasoning/law as to how this would pass).

[GMK]

After further review, I think you're right, JRG. (I didn't go back and connect all the dots.)

or maybe leevena sees something that's not in the linked article.

[SLuskin]

I agree with JRG. You can't do that and be compliant.

[leevena]

Difficult to say without more information. All you have given us is the contribution amounts per unit. What is needed is an explanation of the total premium generated for each category along with the size of each group. For example, if you had 10 HCE's and 3 NHCE's in your group, good chance it will fail. If however you had 10 HCE's and 200 NHCE's there is a good chance it will not fail. Also, keep in mind you are testing for eligibility and contributions/benefits.

I too read the question posted incorrectly. I did answered this from the perspective of a full blown 125.

For a POP only (god, I am hoping I read this correctly this time or this will be really embarassing) the only test you need to satisfy is the eligibility. The eligibility testing essential says that the employer is making the plan available to enough of the non HCE's. If the POP is available to all employees, which it sounds like it is, then it passes the eligibility test.

[GMK]

but see post #4, above, please.

[leevena]

You now know that I do not have great reading skills, so are you now testing my counting skills to see if I can find #4? LOL I did count twice just to make sure.

Eligibility testing for the POP is the only test that needs to be satisfied. I just read your link, which by the way is one of the better written descriptions I have seen, and it confirms my position. Scroll down to the end of page 3 POP plans. It states that the POP only needs to pass the eligibilty test. Then scroll back up to Eligibility, where it states that the easiest way to make the plan pass this test is "to make all employees eligible."

As I mentioned in my last post, I am assuming that this the POP is made available to all employees. If it is not, then there is a problem and I would agree with you.

[Chaz]

What am I missing?

It is correct that there is a safe harbor for POP plans from the contributions and benefits and key employee nondiscrimination tests. It is my understanding, however, that this does NOT mean that an employer can provide higher levels of contributions to HCEs. See the examples in Prop. Treas. Reg. 1.125-7(b)(3)(iv) (particularly examples 2 and 3).

Again, am I missing something?

[leevena]

What am I missing?

It is correct that there is a safe harbor for POP plans from the contributions and benefits and key employee nondiscrimination tests. It is my understanding, however, that this does NOT mean that an employer can provide higher levels of contributions to HCEs. See the examples in Prop. Treas. Reg. 1.125-7(b)(3)(iv) particularly examples 2 and 3).

Again, am I missing something?

I don't know, maybe I am missing something. I am under the impression that if the ER allows all of the employees to participate in the POP plan, than the in fact have passed the eligibility test. Is there something different? I read the link that was provided and that document says the same thing.

[JRG]

You now know that I do not have great reading skills, so are you now testing my counting skills to see if I can find #4? LOL I did count twice just to make sure.

Eligibility testing for the POP is the only test that needs to be satisfied. I just read your link, which by the way is one of the better written descriptions I have seen, and it confirms my position. Scroll down to the end of page 3 POP plans. It states that the POP only needs to pass the eligibilty test. Then scroll back up to Eligibility, where it states that the easiest way to make the plan pass this test is "to make all employees eligible."

As I mentioned in my last post, I am assuming that this the POP is made available to all employees. If it is not, then there is a problem and I would agree with you.

Correct, but under the Elgibility Test heading, it lists 3 requirements to pass the eligibility test. On page 2, #3 says the same benefits in the same amounts must be offered to NHCEs and HCEs?

[leevena]

You now know that I do not have great reading skills, so are you now testing my counting skills to see if I can find #4? LOL I did count twice just to make sure.

Eligibility testing for the POP is the only test that needs to be satisfied. I just read your link, which by the way is one of the better written descriptions I have seen, and it confirms my position. Scroll down to the end of page 3 POP plans. It states that the POP only needs to pass the eligibilty test. Then scroll back up to Eligibility, where it states that the easiest way to make the plan pass this test is "to make all employees eligible."

As I mentioned in my last post, I am assuming that this the POP is made available to all employees. If it is not, then there is a problem and I would agree with you.

Correct, but under the Elgibility Test heading, it lists 3 requirements to pass the eligibility test. On page 2, #3 says the same benefits in the same amounts must be offered to NHCEs and HCEs?

Well it looks like I stand corrected. I was always under the assumption that as long as all were offered, there was no problem. Thanks for the help.

[Chaz]

What am I missing?

It is correct that there is a safe harbor for POP plans from the contributions and benefits and key employee nondiscrimination tests. It is my understanding, however, that this does NOT mean that an employer can provide higher levels of contributions to HCEs. See the examples in Prop. Treas. Reg. 1.125-7(b)(3)(iv) particularly examples 2 and 3).

Again, am I missing something?

I don't know, maybe I am missing something. I am under the impression that if the ER allows all of the employees to participate in the POP plan, than the in fact have passed the eligibility test. Is there something different? I read the link that was provided and that document says the same thing.

The proposed regs added a benefits component to the eligibility test. See the above cited examples.

Take a step back: Do you think it is likely that the IRS would permit an employer to contribute 99% of the cost of coverage for HCEs and 1% for NHCEs while still passing the eligibility test? I don't think so.

I think the IRS added the safe harbor because it felt comfortable with it given the new benefits component.

[WRITTEN BEFORE JRG'S LAST POST]

[GMK]

Well it looks like I stand corrected.

Me, too, actually. Fortunately, our POP easily meets eligibility.

(BTW, for future reference, the post numbers are in the upper right hand corner of each posting.)

[Guest JGreen7]

I hope it's OK to add a question to this useful thread.

We have a small company with 2 HCE and 1 NHCE. We're planning to start a dependent care plan.

I've worked through the 3 tests and since we're offering the plan to everyone we're OK with the eligibility test.

Contributions don't discriminate since all we're doing is allowing everyone to choose how much they want withheld.

But, I think we are restricted with the 25% benefits to HCE. i.e., if the NHCE withholds $5000 /yr the HCEs can withhold a total of $1665 (25% of $6665). Am I correct?

Thanks

[Guest jackmo]

You may have forgotten the 55% test. That's the killer. HCEs will NOT be able to participate in Daycare reimbursement.