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Section 105(h) Non-Discrimination Tests

Currently, Code Section 105(h) only applies to self-funded health plans. The 105(h) test is designed to verify that “enough” non-highly compensated individuals (HCIs) “benefit” under the health plan and that the health plan’s benefits (e.g., deductible levels and covered benefits) do not favor HCIs.

There are two tests which both must be satisfied in order to pass the 105(h) test.

  1. Eligibility Test – focuses on whether enough non-HCIs “benefit” under the plan. The term “benefit” generally means that the employee is actually enrolled in the plan (and not merely eligible to enroll). The Eligibility Test includes:
    • 70 Percent Test - is satisfied if the plan benefits 70 percent or more of all employees.
    • 70 Percent / 80 Percent Test - the employer must first verify that 70 percent or more of all employees are "eligible" to benefit under the plan. If so, the plan must actually benefit 80 percent or more of all those eligible employees.
    • Nondiscriminatory Classification Test - is passed if, based on certain "facts and circumstances," the plan does not discriminate in favor of HCI eligibility.
  2. Benefits Test – the same benefits are provided to both HCIs and non-HCIs. The test would be violated if an employer offered better eligibility terms for HCIs than non-HCIs (e.g., immediate eligibility versus 90-day waiting period). It would also be violated if benefits increase with years of service or compensation.

Failing the test can cause HCIs to have some of their benefits become taxable.

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