Non Discrimination Testing for Section 125©2009 Ric Joyner, eflexgroup.com Non Discrimination...

©2009 Ric Joyner, eflexgroup.com

Non Discrimination Testing for Non Discrimination Testing for Section 125 Section 125

Section 125 Eliminates Section 125 Eliminates Comparable Rules for HSAComparable Rules for HSA

Yes!Yes!


IntroductionIntroduction• Ric Joyner, MBA, CEBS, CFCI• Co-founder of eflexgroup.com (eflex)

– Nationwide TPA of FSAs, HRAs, HSAs, Transit, COBRA– We don’t talk about service. We prove it.

• Housekeeping Items– Please ask questions but…– Will answer questions at end

• Intermediate to advanced section 125• Will use a different approach. We will focus on

HSA and how the non discrimination testing for section 125 changes HSA comparable rule


AgendaAgenda

• Overview• Case Studies• Application of Non Discrimination Tests• Summary• Questions


HSA Comparable RulesHSA Comparable Rules

The BOXHSA Contribution Rules: Employer

Contributions• Always excluded from employees’ income

(pre-tax)– Must be “comparable” for all employees participating in the

HSA. If not comparable, there will be an excise tax equal to 35% of the amount the employer contributed to employee HSAs

– Self-employed, partners and S-corporation shareholders are generally not employees; they can’t receive an employer contribution; they may make deductible contributions to the HSA on their own taxes

Source: All About HSAs, July 22 08 Treas.gov


Differentiating Differentiating HSA ContributionsHSA Contributions

• Geographic divisions are one of the big problems with the comparability rules

• You can’t differentiate employer HSA contributions based on:– Geographic region– Operating division – Any other reasonable business classification that can result in

different health coverage for different groups at different costs.Source: Gail M. Olsen, Reinhart Boerner Van Deuren, SC

http://employerbook.hypermart.net/Reg1563-1T.htm#a1

http://employerbook.hypermart.net/Reg1563-1T.htm#a1


What I have seenWhat I have seen• Agents stop at

comparable rules---The Box

• But we need pre-tax contributions thus…

• Install a Section 125• But now the confusion

starts because people don’t understand section 125 rules

• Default is Comparable Rules


Why Use Section 125 Why Use Section 125 for HSAs?for HSAs?

• Eliminates comparable rules, which are inflexible but easy to understand (all about HSAs page 23)– Employer matching contributions to the HSA through a

cafeteria plan are not subject to the comparability rules But cafeteria plan nondiscrimination rules apply contributions cannot be greater for higher paid employees than they are for lower paid employees

– Contributions that favor lower paid employees are OK• Allows employees to take pre-tax payroll deductions

(IRS term “salary reduction”) of HSA contributions versus taking deduction at end of year


Sum of HSA Sum of HSA Comparable RulesComparable Rules

Treat everyone the sameGive everyone the same thingPart time is less than 30 hours per weekGive more to non-HCEsSingle or family coverage is only classification

The positive: it’s easy to see if you’re passing or failing

The negative: there’s a lack of flexibility in meeting diverse needs of the employers

Question: What about amounts based on different health plans?


Move outside of the boxMove outside of the box through education through education

• “We can do just about anything in a cafeteria plan if we don’t favor the highly compensated” Ric Joyner

HSA COMPARABLE

RULES

SECTION 125

SE

CTIO

N 125

SECTION 125

SE

CTIO

N 125


DELVING INTO DELVING INTO SECTION 125 SECTION 125 NON NON DISCRIMINATIDISCRIMINATI ON TESTINGON TESTING

Changing the HSA rules by:


Section 125 PlansSection 125 Plans

There are five main parts to section 125 Cafeteria plans: 1. Premium Only Plans: also known as POP plans or

premium conversion, for the express purpose of allowing employees to pre-tax premiums

2. Health FSA: for medical expenses similar to HSAs or HRAs

3. Dependent Care: for dependent care expenses so families can work or go to school

4. Individual Premiums FSA: purchased outside of the employer

5. Full Cafeteria Plans: allow for a menu of choices funded at different levels by employee selections


POPs are common POPs are common for HSAsfor HSAs

Premium Only Plans (POP)


Overview of StepsOverview of Steps• Step one is to determine all the types of employees?

– Highly compensated – Classes

• Part Time• Age related• Geography

– Related companies

• Step two is identifybenefits being offered

– Section 125– HSA– HDHP – Etc


StepsSteps• Step three composition of employees

– Identify salaries – Components of test

• Step four what is the employer goals– What is our strategy? What is the employer goals with

funding the benefits?– Do we need more flexibility than the comparable

rules?– WE MUST USE Section 125 Non Discrimination

Testing• Run the tests at the end of the year with the new

regulations


Disqualification of PlanDisqualification of Plan

• Plan is disqualified if non-discrimination testing is not accurately completed for as long as the plan has been in force

• Problem with “free” POP plans – Who is responsible for updating the plan? – Who is responsible for the test? – Who is responsible for the enrollment?

Speaking of enrollment...


Who Are We Testing?


• Key Employees• Highly Compensated Employees• Non-Highly Compensated Employees• Officers

Testing players


Key/Officer EmployeeKey/Officer Employee

• An officer earning more than $150,000 in the 2008 taxable year; $160,000 in 2009

• More than 5% owner (see above); • More than 1% owner receiving compensation

in excess of $150,000.• Note government entities do not

have key employees.Note: A maximum rule exists. No more than 50

employees can be treated as key or 10%. Example


HSA Highly Compensated HSA Highly Compensated Employees (HCEs)Employees (HCEs)For HSA comparability rules, an HCE is determined by using the 414(q) rules (the same rules used for qualified retirement plans and dependent care assistance plans). The 414(q) rules define an HCE as:

1. A 5% owner in either the current or preceding year, or2. an employee who received compensation in excess

of $110,000 (2009 indexed limit) in the preceding year, subject to a top-paid group election by the employer


Section 125 Highly CompensatedSection 125 Highly Compensated• An officer • A shareholder owning more than 5% of employer voting

power or value of all classes of stock• An employee who earned in excess

of $105,000 in 2008; $110,000 in 2009• A spouse or dependent of an individual

described above working for the same employer

• Employees who were in top-paid group (top 20% of employer’s entire workforce) for preceding plan year, or current plan year if first year of employment


OfficerOfficer• An employee with the authority of an

administrative executive:– An employee with an officer’s title, but no authority,

(e.g., Bank VP) is not considered an Officer – An employee with authority and not the title is

considered an officer (e.g., Manager of a Credit Union)

• Officer consideration is based on facts and circumstances (i.e., nature and extent of duties, authority, and continuity of service)


Non HCENon HCE

• Everyone else


WHAT ARE THE TESTS?WHAT ARE THE TESTS?

Glad you asked….


NonNon--discriminationdiscrimination

Four non-discrimination tests:1. Eligibility2. Contributions3. Benefits4. Concentration


Eligibility TestEligibility Test

Must meet four requirements to be non- discriminatory:

1. No more than a three-year wait to participate; employment requirement is the same for each employee.

2. Participation for eligible employee begins no later than the first day of the first plan year, beginning after the date employment requirement is satisfied.


Eligibility TestEligibility Test3. The plan benefits a group of employees who qualify under a

reasonable classification established by the employer [as defined in Treas. Reg 1.410(b)4(b)] (e.g., salaried, hourly, full time, part time). −

The plan must pass the safe harbor percentage test (a certain percentage of non-highly compensated individuals (HCI) must be eligible to make an election).

−

A plan automatically passes the safe harbor if all employees of the employer are eligible.

4. Plan will fail eligibility test if there is not the same available benefits or employer flex credits for highly compensated participants (HCP) and non-HCP, or if the plan requires greater salary reductions for non-HCPs than HCPs with same benefit elections.


Eligible Test ExplainedEligible Test Explained• Treat everyone the same• Let them come on at the same time such as

immediate at point of hire or first plan month after 30 days

• Idea: Run the same as health care or other benefits for ease of administration and employee confusion

• Easy enough but what about the need for flexibility

• Ok---management versus classes example


Contributions/BenefitsContributions/BenefitsSmell or Facts and Circumstances Test• Plan must give each similarly situated participant

(family vs. single coverage; varying geographical locations) the same opportunity to elect qualified benefits

• Plan must give each similarly situated participants the same election with respect to employer contributions.


Concentration TestConcentration TestKey Employee Concentration Test• Compares non-taxable benefits provided to key employees to

non-taxable benefits provided to all employees• Non-taxable benefits include the value of the group medical

premium, contributions to a Flexible Spending Arrangement, contributions to an HRA or HSA, and contributions to any other benefit provided under the Section 125 Plan

• Value of non-taxable benefits provided to key employees cannot exceed 25% of the total non-taxable benefits provided under the plan.

• This is the test you will run into issues most of the time for small employer. If using a POP go to the new Safe Harbor Test (SHT)


Application of Concentration TestApplication of Concentration Test

• Step 1 Find the Key employees• Step 2 Find the NHCE• Step 3 Total contributions– after enrollment• Step 4 Divide by 25% of the NHCE• Step 5 Put that up against the Key employees• Step 6 Pass the test or back down Key

employees until they reach the acceptable pass• Step 7 Run the test at the end of the year


Comparison of HSA/125Comparison of HSA/125

HSA Description Section 125 DescriptionEligibility Same amount

similarly situatedEligibility Same eligibility for

everyoneContributions/benefits

Same % Contributions/benefits

Same for everyone

Concentration Contribute more to NHCE

Concentration 25% maximum for key employees only

Inflexible Flexible


They sound too similar.

Where’s the beef?

Hey, Wait!


SummarySummary• Classes• Hourly/salary• Menu of products• Different entry dates• Outshine your competition with

plan designs that meet more needs“You can do anything you want, with in reason,

as long as it does not favor the highly compensated”


Section 125 and Flexible Funding Ideas


IdeasIdeas

Based on le

ngth of

servi

ce

Based on salaryBased on percent of

salary Based o

n

class

Based on turnover

Create a Menu of Benefit choices


Menu of benefitsMenu of benefits• Example:• Based on salary the employees would get

10% of their salary to spend on menu of benefits

• Menu includes:– Everyone gets a basic HDHP– To buy up they can get a lower deductible for

x price– In this 10% is HSA contribution– Other benefits such as voluntary


Menu of benefits Hotel 10Menu of benefits Hotel 10 ““We donWe don’’t have any lightst have any lights…”…”John Smith Salary=

$100,000/10%=$10,000Management (one of 8) out of 30 ee

Jane Doe- CFO Hourly= $20= $41,600= $4,200

Office staff-stable entry date same as management 30 days after hire

Rob Long-VP IT one of 5 Salary=$50,000=$5,000 Same as above- low turnover

Tina Partytime- Call Center one of 17

Hourly= $15=$31,200=$3100

High turnover class so has entry date after 6 months (first of the month)

Total 30


Note: If you have a flex plan Note: If you have a flex plan and offer cash menu they must and offer cash menu they must be allowed to have cash choicebe allowed to have cash choiceName Spend Benefit Result John Smith $10,000 Purchase lower

deductible rest in HSA

No cash left

Jane Doe $4,200 All in HSA No cash leftRob Long $5,000 Single plan

lower deductible

$1000 in cash

Tina Party Time $3100 Family plan and funds HSA with own money

Choice leaves cost to employee for health plan

Family plan $8000-$3100= $4,900/.3=$1470Real premium cost= $3430

Do we or don’t we pass any or all tests? Chat


TestsTestsEligibility Contributions Benefits Concentration SHT

Yes Maybe Yes Maybe Yes

Warning: Check EO on whether or not you are covered for offering this information

Free POPs have the most exposure for your clients and you. Documents get old, tests aren’t done, and compliance left to the wind. Then finger pointing

POP should not be free because the employer gets FICA tax savings


Case Study B2BCase Study B2B

“Hey Everyone,Have a Church School that told me they are going to make a 4k yearly contribution to the HSA accounts of the pastors and 720 for the rest of the group.Can they "carve out" theses pastors for the purposes of HSA contributions? My understanding is that they cannot.

Thanks,Brad”• What is your answer? Type into chat area


AnswersAnswers

• Are they going to use a pop plan?• What we need to know. What is the ratio

between pastors and employees?• What are the salaries compared to this• Most tests should pass but the

concentration may not depending on the ratio

• Is this what you understand from this talk?• Many agents automatically said no citing


• 50 hourly employees with no significant authority• No union• High turnover• Employer doesn’t want to fund HSA for anyone with less than

one year of service to match retirement plan– OK with Section 125 (3-year maximum)– Classes work as well (Hourly vs. Salary)

• This plan is a go for eligibility, contributions and benefits• After enrollment test for concentration

Case Study #1 Flexible Entry Dates


Case Study #1Case Study #1 Flexible Entry DatesFlexible Entry Dates• Let’s take all participating employees and

test them on the concentration • We are 26% for HCE and key employees,

so we ask them to back down contribution for HSA or health by 1%

• Our plan is ready to go; employer is pleased • Note actual test under new regs

must be done at year end


Case Study # 2Case Study # 2 Flexible Funding for HSAsFlexible Funding for HSAs• Employer is struggling with offering employee benefits – 25 salaried, 50 hourly employees

• Goal is to be creative, but cap annual offerings to a fixed expense that is controllable

• Your idea? A full cafeteria plan with a menu of choices

• Step 1: Employer will offer two health options


Plan Design• Employer requires employees to pay more for

fully insured plan as part of their choices; Section 125 POP is needed

• Employer will fund 50% of HSA deductible if employee takes HDHP/HSA; employee may elect to fund other 50% of HSA

• Employer will pay 75% of all premiums• Single/ family coverage is funded accordingly• Use same census from other group

Case Study # 2 Flexible Funding for HSAs


• Step 2: Lets do the enrollment because we don’t know who’s choosing which plan or opt-out; thus a preliminary eyeball won’t work

• Step 3. When enrollment is known, we can play with formulas to determine if non- discrimination test applied

• Step 4: Follow all steps outlined prior and determine that we pass all tests



• Results of enrollment– 5 employees (mix of salaried and hourly) opted out– 20 employees had families: 10 elected full coverage;

10 elected the HDHP– 50 singles: 25 elected full coverage; 25 elected the

HDHP• Employer is amazed at the amount of people for

which we met needs and at the flexibility of plan design

• Employees are happier, but additional education needs to happen through HR



Red FlagsRed Flags NonNon--discrimination Testdiscrimination Test• Zero non-HCEs eligible for the plan • Plan excludes high percentage of non-HCEs• Not all employees receive the same employer

contributions • Key employees or HCEs receive more employer

contributions toward group medical premium or FSA

• Disparate waiting periods or disparate eligibility requirements


• Different benefits provided to employees

• A high percentage (>25%) of key employees contributing to the FSA

• Only one participant in dependent care FSA; that participant is an HCE

• Plans frequently fail the dependent care test; the plan can’t have just HCEs participating dependent care or it will fail

Red Flags Non-discrimination Test


Tips on passing the testTips on passing the test• Remove the Keys from the test by paying

100% for their benefit---owners/officers love this anyway

• Pull as many people into the test as possible– Brother sister organization– Get a PEO---good strategy for small

companies• Create a Union---sorry just kidding• Regardless get creative


Get DirectionsGet Directions

When you come to the fork in the road…ask directions. Ric Joyner

When you come to the fork in the road…take it. Yogi Berra

Famous

Not Famous


SummarySummary• Learn Section 125 non-discrimination rules to

design plans that meet employer needs• Don’t trust one person as a guru; find more than

one answer• Don’t expect vendors to give you free advice if

you don’t use their products• Use www.benefitblog.com

http://www.benefitblog.com/


QuestionsQuestions• Ric Joyner • [email protected]• 608-243-8277 ext 125 (get it?)• www.eflexgroup.com

mailto:[email protected]

Non Discrimination Testing for Section 125©2009 Ric Joyner, eflexgroup.com Non Discrimination...

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Transcript of Non Discrimination Testing for Section 125©2009 Ric Joyner, eflexgroup.com Non Discrimination...