Nondiscrimination in Action – New BRCC White Paper Series

The BRCC is announcing a new white paper analytic series titled “Nondiscrimination in Action”. This series will feature monthly publication of nondiscrimination standards and testing rules across the spectrum of health and welfare plan testing requirements. The series includes the following topics:

• Overview of nondiscrimination Testing (“NDT”) under the Internal Revenue Code (“IRC”);
• NDT for Self-funded Health & Welfare Plans;
• NDT for Cafeteria Plans;
• NDT for Group Long-Term Health Insurance;
• NDT for Health Savings Accounts;
• NDT for Voluntary Employees Beneficiary Associations;
• NDT for Dependent Care FSAs;
• NDT for Education Assistance Plans;
• NDT for Adoption Assistance Plans;
• NDT for Wellness Plans, including HIPAA, GINA & the ADA; and,
• NDT Related Penalties.

Each forthcoming monthly edition of the Baldwin Bulletin will feature one of the above-referenced topics.

For this month, we’re launching the services with an overview of nondiscrimination requirements contained within the IRC. This information is detailed in the following sections of this article.

Part I: Overview

Tax Benefits and Consequences. Many employer-provided benefits are excluded from an employee’s gross income as a result of particular federal tax incentives; thus, they are not subject to income tax respecting the actual value of the workplace benefits that are received by the employee. These are referred to as “tax advantaged” arrangements, and they require an employer’s steadfast diligence as to the compliant design, implementation, administration, and termination of these types of benefit programs.

Nondiscrimination in Favor of Highly Compensated Participants and Key Employees. One category of structural requirements relates to prohibitions against employee benefit plans that are designed to favor highly compensated participants and key employees with respect to plan benefits, rights, and features afforded to other plan participants. Consequently, it is imperative that the range of applicable nondiscrimination provisions within the IRC are both understood and properly administered throughout the lifespan of a tax-advantaged benefit plan or program. Accordingly, this guide is designed to offer employers summaries, outlines, overviews, and other significant resources designed to make the business of nondiscrimination compliance assuredness for tax-advantaged benefit plans more digestible and actionable for the plan sponsor.

Part II: Rules Vary by Benefit

Applicable Plans. There is no universal set of standardized nondiscrimination rules or testing requirements; rather, these requirements vary for each type of benefit that is subject to a nondiscrimination requirement under the IRC. Specifically, the types of welfare benefit plans and programs that are subject to individualized nondiscrimination requirements include each of the following:

• Self-funded health insurance maintained under IRC §105(h);
• Health Care Flexible Spending Accounts maintained under IRC §105;
• Group term life insurance offered under IRC §79;
• Cafeteria Plans administered under IRC §125;
• Voluntary Employee Beneficiary Associations (“VEBA”) administrated under IRC §505(b);
• Dependent Care Flexible Spending Accounts (“DCAP”) maintained under IRC §129;
• Adoption Assistance Plan maintained under IRC §137;
• Education Assistance Plans maintained under IRC §127; and
• Health Savings Accounts (HSA) maintained under IRC §223.

Part III: Key Concepts of Nondiscrimination Compliance

Key Concepts of Nondiscrimination. Key concepts that are often associated with nondiscrimination testing include:

• Prohibited Group. Who is in the prohibited group? This is the group that a plan cannot discriminate in favor of. It generally consists of highly compensated participants and key employees, but the definitions for these categories of employees vary by benefit. Highly compensated participants include highly compensated individuals (“HCI”) and highly compensated employees (“HCE”).
• Eligibility Classifications. What eligibility classification standards apply? This usually refers to the percentage of the employee population that is eligible for, or receives a benefit from, the plan.
• Employee Exclusions. Which employees can be excluded from the testing population? For purposes of satisfaction of the applicable nondiscrimination rules, certain employees can be excluded from the employee population count – usually those that have not met age or service requirements or for those employees that are collectively-bargained.
• Discrimination Outcomes. What is the consequence of a finding of discrimination? When discrimination is indicated, generally speaking, the participants of the prohibited group will not be eligible to receive the tax benefit associated with the value of the underlying benefit plan or program. Sometimes, though, all employees are penalized, and all benefits received under the plan may be subject to income taxation by the IRS.

Types of Benefits Subject to Testing. The remainder of this document discusses the types of employee welfare benefits that must comply with nondiscrimination rules.

Part IV: Summary of Specific Internal Revenue Code Nondiscrimination Tests

Part V: Questions & Additional Support

Additional Resources

To obtain additional support for performance of these and other nondiscrimination related requirements, as mandated by the Internal Revenue Code, please reach out to your local service colleague or your client advisor. The Baldwin Group maintains an extensive suite of support solutions and advisory guidance capabilities respecting an employer plan sponsor’s performance of its IRS nondiscrimination related compliance assuredness activities. The Baldwin Regulatory Compliance Collaborative (the “BRCC”) also offers a carefully curated range of consultative and advisory support solutions related to the administration of US-based employee benefit plans, programs, and other offerings.