Employers who are designing a health and welfare benefit plan for their employees often wonder about the rules relating to setting premiums for employees. Employers generally have significant flexibility in this part of their plan’s design.

Employers consider charging employees flat dollar amounts, charging a set percentage of premium, or changing contributions based on location or job class.

Employers should be aware that there are different nondiscrimination requirements to consider.

Employers need to review the applicable nondiscrimination requirements under Internal Revenue Code Section 125 (for cafeteria plans) and Section 105(h) (for self-funded plans). The plan cannot favor highly compensated individuals. Many employers also erroneously assume that none of their employees fall into the “highly compensated” category, so the rules do not apply to them. As a best practice, any time an employer has a plan design with different levels of employer contributions, the employer should run the applicable testing to ensure its plan is compliant.

Definition of Highly Compensated Individuals

Under Section 125, benefits plans cannot discriminate in favor of highly compensated individuals or key employees. A highly compensated individual is defined as:

  • Officers
  • Five percent shareholders
  • Highly compensated employees (HCEs)
  • Spouses or dependents of any of the above
  • The highest paid 25% of all employees

Consequences of Violating Nondiscrimination Rules

Violating HIPAA nondiscrimination requirements can trigger numerous potential penalties, including an excise tax penalty of $100 per day per affected plan participant.

If the plan violates one of the structural requirements of Section 125, then the plan will not be a valid cafeteria plan and no participant will be entitled to favorable tax treatment under Section 125.

If the plan fails nondiscrimination tests under Section 105(h), the highly compensated individuals excess reimbursements will be taxable.

Please reach out to your Brio contact for more information.

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