105 Non Discrimination Rules aka Grandfathering Non Discrimination Testing

By Todd Martin, JD Reinhart Law


Note that the result for a failure to pass the test for self-funded plans was that the benefits became taxable to the highly compensated employees.  The result for failing the PPACA test is $100/day per participant.  -Ouch.  

Here is the statutory language relating to the testing:


(a) IN GENERAL.—A group health plan (other than a self-insured plan) shall satisfy the requirements of section 105(h)(2) of the Internal Revenue Code of 1986 (relating to prohibition on discrimination in favor of highly compensated individuals).

(b) RULES AND DEFINITIONS.—For purposes of this section—

(1) CERTAIN RULES TO APPLY.—Rules similar to the rules contained in paragraphs (3), (4), and (8) of section 105(h) [see below] of such Code shall apply.

(2) HIGHLY COMPENSATED INDIVIDUAL.—The term ‘highly compensated individual’ has the meaning given such term by section 105(h)(5) of such Code.’’.

Referenced Sections of Code Section 105(h):

(3) Nondiscriminatory eligibility classifications.

(A) In general. A self-insured medical reimbursement plan does not satisfy the requirements of subparagraph (A) of paragraph (2) unless such plan benefits—

(i) 70 percent or more of all employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all employees are eligible to benefit under the plan; or

(ii) such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated individuals.

(B) Exclusion of certain employees. For purposes of subparagraph (A) , there may be excluded from consideration—

(i) employees who have not completed 3 years of service;

(ii) employees who have not attained age 25;

(iii) part-time or seasonal employees;

(iv) employees not included in the plan who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the Secretary finds to be a collective bargaining agreement, if accident and health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers; and

(v) employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2) ) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3) ).

(4) Nondiscriminatory benefits. A self-insured medical reimbursement plan does not meet the requirements of subparagraph (B) of paragraph (2) unless all benefits provided for participants who are highly compensated individuals are provided for all other participants.

(5) Highly compensated individual defined. For purposes of this subsection , the term “highly compensated individual” means an individual who is—

(A) one of the 5 highest paid officers,

(B) a shareholder who owns (with the application of section 318 ) more than 10 percent in value of the stock of the employer, or

(C) among the highest paid 25 percent of all employees (other than employees described in paragraph (3)(B) who are not participants).

(8) Certain controlled groups, etc. All employees who are treated as employed by a single employer under subsection (b) , (c) , or (m) of section 414 shall be treated as employed by a single employer for purposes of this section .