Non-Discrimination Testing: Does it Apply to Me?

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January 2, 2013 — 1,846 views  
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Non-discrimination tests are to make sure contributions do not discriminate and act in favor of shareholders, officers, or employees whose main duties include supervision of other employees or those that are highly compensated.

These tests are several calculations that are done on benefit, enrollment, and cost data that is provided by the employer group. The testing is done annually and aims at demonstrating that certain employees are not benefiting from the company.

To qualify for a status that is favored by tax, the benefit plan that is offered by an employer should not discriminate toward employees that are highly favored and primary employees in terms of contributions, eligibility, and benefits.

Non-Discrimination Rules for Health Plans

Two requirements need to be met by group health plans that are fully ensured. To begin with, a health plan is not allowed to discriminate toward highly compensated individuals. Secondly, health plan benefits that are available to individuals who are highly compensated should also be available to their dependents and other plan participants as well. If these rules are not abided by, there usually are serious consequences.

The plans That are Usually Tested

According to the type of benefits that are offered and their financial structure, the plans listed below are usually subjected to non-discrimination testing.

  • Medical plans or medical reimbursement plans
  • Cafeteria plans
  • Group term life insurance
  • Dependent care reimbursement plans
  • Health saving accounts

Patient Protection and Affordable Care Act (PPACA)

The PPACA has been amended by Health Care and Education Reconciliation Act; it proposes to make health plans that are fully insured and eligible for non-discrimination rules and testing.

Who are the Highly Compensated Individuals to require this Testing?

A shareholder who owns over 10% of the stock of the company is classified as an individual who gets highly compensated. The top 25 percent of employees who are the highest paid and those among the company’s top five highest-paid employees are all considered for this testing.

Do all Plans Have to Comply with Non-Discrimination Requirements? 

These testing requirements don’t apply to insured grandfathered group plans or individual plans. Group plans that are self-insured are subject to these rules whether they are grandfathered or not.

Things to do in Case Your Plan Fails the Testing

Consider alternative testing methods, which may successfully pass the plan. Make use of a consultant that is technically savvy, as a new approach could yield positive results. Even after using an alternative method, if your plan only just manages to pass, you might want to think about making changes so that you get a better outcome in the future.

After your plan fails the testing, take whatever corrective measures you need to keep the plan qualified. The first step toward this is to usually cut down the contributions that are incurred by participants who are highly compensated. This should be done until a point that will make the plans pass the test. The employees who defer the most are generally the first to receive refunds.

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