Many employers have discovered the benefits of offering their workers premium-only plans (POP), which allow employees to pay their health insurance premiums with “before tax” dollars. This means the premiums are deducted from paychecks on a pre-tax basis, saving them money.
Of course, as with any other tax code provision, employers are subject to strict regulations when opting for POPs. In particular, the law states that the plan must be non-discriminatory, meaning the plans cannot discriminate in favor of key or highly-compensated employees with regard to eligibility, contributions, or benefits.
If the plan’s design benefits a reasonable cross-section of employees, and enrollment is available to all, the plan will most likely pass eligibility and benefits standards. Keeping the plan simple and uniformly available will cut down on the number of tests that the employer must pass. Therefore, in these cases employers only need to worry about the Concentration Test and Dependent Care Test.
The Concentration Test states that the non-taxable benefits received by “key employees” must not exceed 25 percent of benefits received by all employees in total. First, we must define key employees, according to IRC 416 (i):
- Officers of employer who earn more than $160,000 annually
- Those with at least one percent ownership in the company who earn more than $150,000 annually
- Those with more than five percent ownership in the company
Then, the test formula simply divides the total benefits of Key Employees by the total benefits received by all employees. If the resulting percentage is greater than 25 percent, the plan fails the Concentration Test.
The remedy is fairly simple: Key employees must simply pay more of the cost of benefits on an after-tax basis, in order to keep their percentage of benefits below 25 percent. Employers should run the Concentration Test regularly to ensure continuous compliance with the law.
Certain special rules do apply, regarding ownership percentages with regard to spouses or family members of key employees. In these cases, professional guidance is essential. For more information on non-discrimination testing and POP plans, please contact us and we’ll be happy to help.