Almost 80% of employers with more than 500 employees fund their health benefit plans through a self-insured arrangement. Nearly 30% of employers with between 100 and 499 employees are self-funded and in excess of 10% of employers with fewer than 100 employees have joined the ranks of the self-insured.
Viewpoints from Craig Hasday
The question of whether it is permissible to provide disproportionate benefits to a class of employees is one that clients often ask.
IRS rules require that self-insured employers offer plans that are non-discriminatory, and many employers are unaware of the mechanics of the discrimination testing. The rules define a highly compensated employee (HCE) as one of the five highest-paid officers; a shareholder who owns more than 10% in the value of the stock of the employer; or among the highest-paid 25% of all employees.
There are two nondiscrimination tests for the employer:
an eligibility test, which looks to see that at least a certain percentage of employees are eligible to participate (there are three ways to satisfy this test, one of which is 70% eligibility); and a benefits test which assesses whether benefits to highly compensated employees are offered to all employees. If the plan is determined to be discriminatory, any benefits preferences are considered taxable income to the HCE.
The enactment of the Affordable Care Act (ACA) extended this testing under Section 105(h) to insured plans.
Under current rules, which will be in effect until ACA rules are established, insured plans are able to rely on Employee Retirement Income Security Act (ERISA) rules which permit providing benefits to a permitted class. This “class” is pretty liberal and can, for example, be all officers or all employees earning over a certain dollar amount.
With the turmoil in Washington, it is unlikely than IRS will focus on 105(h). For self-insured employees, those rules are already here.
President, National Employee Benefits Practice