Self-Insured & Cafeteria Plan Nondiscrimination

[JRG]

Came across the following situation:

A self-insured health plan provides $7000 in employer contributions towards the "premium" for NHCEs, and $10,000 (100%) for HCEs (officers). The NHCEs can elect to make a $3000 pre-tax contribution for the rest under a cafeteria plan.

In reading the 105 nondiscirmination rules, it says that pre-tax contributions under a 125 plan are treated as employer contributions..thus, for testing purposes it looks like the employer is providing $10,000 to all participants.

If this correct? On its face it looks like this plan is discriminatory.

Also, if the Cafeteria plan was found to be discriminatory, the HCEs pre-tax contributions would become after-tax. However, there are none in this situation, so there seems to be no penalty.

Has anyone ever looked at this type of situation before? Am I reading one of the rules incorrectly?

[Chaz]

The short answer is that the plan likely passes the cafeteria plan nondiscrimination tests under Code Section 125 because the HCEs aren't participating in a cafeteria plan. The plan will, however, likely fail the benefits test of the self-insured medical plan tests under Code Section 105 because the benefits provided (i.e., the employer contributions) thereunder are discriminatory.

The consequences for failing the Code Section 105(h) tests are NOT that contributions become taxable. Rather, the "excess reimbursements" made to HCEs will be taxable. That calculation can be complicated.

[JRG]

Thanks,

This is the issue I am confused about. Under 105, the pre-tax employee contributions are considered employer contributions, which means that the total employer contributions (and thus benefits provided) for HCEs and NHCEs would be the same. Thus, it seems like this is an easy way to get around the 105 nondiscrimination rules?

[Chaz]

I'm not sure where in 105 there is the language that employee contributions are considered employer contributions. I skimmed the regs VERY quickly.

Treas. Reg. 1.105-11©(3) is the location of the prohibition on having discriminatory benefits and there is no such mention.

[Guest morris]

Agree with Chaz on last statement. Disagree with Chaz that employer contributions are "benefits" under the plan. Benefits under the plan are the medical benefits.

[Chaz]

Agree with Chaz on last statement. Disagree with Chaz that employer contributions are "benefits" under the plan. Benefits under the plan are the medical benefits.

What, then, do you make of the reference to the requirement in the above mentioned regulation that states that "any maximum limit attributable to employer contributions" must be uniform for all participants?

[Guest morris]

Code Section 105(h) rules only affect whether reimbursements under a self-insured medical plan are taxable.

My apologies to Chaz. He's correct. Required employee contributions must be identical to avoid discrimination under 105 (which means employer contributions must be the same).

In regards to the statment that "employee contributions become employer contributions"--I've only seen that in regard to section 125. That would have nothing to do with A/D testing under 105(h).