Pop discrimination safe harbor

[Insurnacegirl555]

Hello, 

I know there is a pop section 125 safe harbor from further discrimination testing if you pass the eligibility test. I’m newer to this and a bit confused. Below is the situation- does it qualify for the safe harbor eligibility test and if not why not? My concern is that the 1 and only HCE is enrolled so that’s 100% and the 40/190 is 21% but the 40/500 is only 8% and I’m not sure if the denominator for the formula includes all those new employees in initial measurement periods and ongoing employees in new measurement periods. 
 

1) fully insured 

2) all participants are offered the identical benefits for identical pricing with identical eligibility rules 

3) only 1 HCE and they are enrolled 

4) at any given time 190 employees on payroll roughly 

5) 500 w2s created at year end (high turn over retail) 

6) 40 are eligible for benefits in any given year 

7) all other active employees are either 1) in initial one year measurement period as variable hour new hires or 2) ongoing employees in a new measurement period 

8 ) every employee is eligible if they average 30 hours a week during a measurement period (no different treatment by class/title) 

[Artie M]

 

Yea, a true POP-only plan can use a broad §125 nondiscrimination safe harbor by passing the eligibility safe-harbor percentage test. But, it seems that this plan doesn’t pass that test.

Under those proposed §125 regs, a POP-only plan is deemed to satisfy the remaining §125 nondiscrimination rules if it satisfies the safe-harbor percentage test for eligibility.  It has to be POP-only, so verify that.

The way I am reading your facts

• 500 W-2s mean there are 500 unique, nonexcludable common-law employees who worked during the plan year;
• The 40 eligible employees include the 1 HCI; and
• There are no other HCIs.

The 500-person annual census, rather than the approximately 190 employees on payroll at a particular moment, is likely the relevant starting point.

Som the plan’s ratio percentage would be: (39/499) / (1/1) =7.82%

Because 99% of the workforce consists of NHCIs, the §1.410(b)-4 safe-harbor percentage is 20.75%. The unsafe-harbor percentage is 20%. A ratio below the unsafe-harbor percentage is considered discriminatory rather than merely subject to a facts-and-circumstances inquiry.  So, the actual ratio percentage of approximately 7.82% fails by a substantial margin. Even if the “40 eligible” meant 40 NHCIs plus the HCI, the ratio would be only about 8%--same result.

The uniform measurement-period rule doesn’t solve the issue.  The one-year measurement period and identical 30-hour rule may satisfy the second requirement of 125(g)(3) and may constitute a reasonable business classification—but they do not establish that the resulting group passes the numerical coverage test.

In particular, employees are not excluded from §125 testing merely because they are in an initial ACA measurement period or an ongoing measurement period; variable-hour, part-time, or short-term employees; or terminated before year-end.  

The facts that everyone eligible receives identical benefits, pricing and election terms are helpful for the benefits-and-contributions component of §125 testing but they don’t cure a failure of the eligibility percentage test.  Similarly, actual enrollment generally is not the issue for the POP safe harbor. The proposed-regulation example expressly contemplates all HCIs enrolling while only 20% of NHCIs enroll; the POP still passes because the employees were eligible on nondiscriminatory terms.

Here, the problem isn’t that the HCI enrolled—it’s that 100% of the HCI group is eligible, while only about 8% of the NHCI group is eligible.

Given the high turnover, perhaps permissive disaggregation might help… not sure it will but the proposed regs permit disaggregating the plan into:

• Employees with at least 1 day but less than 3 years of employment; and
• Employees with at least 3 years of employment.

Each group is then tested separately.