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105(h) Nondiscrimination -- premiums

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Can an employer pay disparate premiums for highly compensated and nonhighly compensated under a self-insured plan? That is, contributing a higher percentage of premiums for the highly paid?

I've read Treas. Reg. 1.105-11, but it reads like it applies only to the actual benefits paid under the plan on claims made. I've also read a number of white papers that suggest that paying more premiums for the highly compensated violates Code Section 105, but I can't see where this follows in the Regs.

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See the benefits test for your answer, it requires that contributions be the same. I have cut and pasted.

  1. Benefits Test-Section 105(h) requires that all benefits provided to HCEs be provided to all other participants and that all benefits available to the dependents of HCEs are also available on the same basis to the dependents of all non-HCE participants. The benefits test has two components:
    1. Discriminatory On Its Face-a plan must meet the following four requirements:
      1. Required employee contributions must be the same for HCEs and non-HCEs
      2. The same type of benefits available to HCEs must be available to non-HCEs
      3. The maximum benefit level cannot vary based on age, years of service, or compensation
      4. HCEs and non-HCEs must have same waiting periods
    2. Discriminatory In Operation-a rare occurrence, such as if the group added a benefit for a short period of time, a HCE received coverage for treatment and then the plan terminated the coverage once treatment was completed.
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Thanks Ivena, but I don't see under Treas. Reg. 1.105-11©(3) -- the Reg on the Benefits Test -- where is says that employee contributions must be the same for HCEs and NHCEs.

The Reg states:

A plan that provides optional benefits to participants will be treated as providing a single benefit with respect to the benefits covered by the option provided that (A) all eligible participants may elect any of the benefits covered by the option and (B) there are either no required employee contributions or the required employee contributions are the same amount. Treas. Reg. 1.105-11©(3)(i) (emphasis added).

Clearly optional benefits, which I read as claims-made benefits provided under the plan, cannot be made available to HCEs and NHCEs at different prices, but does this extend to all benefits under a plan? It seems logical that it would, but I wonder why the Reg is limited to optional benefits. Why not simply state that premiums for HCEs and NHCEs must be identical.

Are premiums benefits that are provided under the plan? Thanks.

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I believe that there are a couple of PLRs (from the 80s?) where the IRS spelled out that a higher level of contributions for HCEs will cause the plan to fail the 105(h) tests.

In addition, if the HCEs are paying their share of the premiums on a pre-tax basis through a cafeteria plan, this arrangement is likely to fail the 125 nondiscrimination tests.

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Thanks Chaz. I'll try to track down the PLRs.

I thought about the 125 angle too.

In my scenario, the employer is contemplating paying 100% for HCEs and 80% for NHCEs. Since the HCEs wouldn't be using the cafeteria plan to pay premiums -- since they would pay nothing -- I think this would work under the cafeteria plan rules.

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Here's what I've found:

  1. PLRs 8411050, 8411051 (substantially similar), and 8336065, hold that waiting periods are benefits under Code Section 105(h). So, if HCEs get in immediately and NHCEs have to wait, say 90 days, then the benefits are discriminatory. Importantly, 8411051 notes "the above ruling is based upon the assumption that the employee contributions required under the Plan will not result in those employees who are not highly compensated individuals within the meaning of section 105(h)(5) of the Code being excluded in greater proportion than highly compensated individuals." This implies that if disparate employee contributions were required under the plan, it could (or would) make the arrangement discriminatory.
  2. PLR 8328065 holds that requiring a participant's survivor to pay a monthly contribution to continue in the plan is nondiscriminatory, but "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 . . . " then the arrangement could violate Treas. Reg. 1.105-11©(3)(ii).

These PLRs, from the early 80s (thank you Chaz), could be more explicit, but seem sufficiently clear to show that the IRS would frown on different premiums for HCEs and NHCEs.

If anyone has clearer guidance on this point, I'd appreciate you pointing me if its direction.

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One somewhat obvious solution is to require the HCEs to pay the same as other employees and bump up their cash compensation in the amount of the 20% (plus a gross-up if the employer wants to make it a total wash for the executives).

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