Section 105(h) of the Internal Revenue Code relates to self-insured medical reimbursement plans. These rules make sure that plans do not unfairly favor highly compensated individuals (HCIs) by providing them with better benefits or eligibility than other employees. A memorandum published by Davis & Harman LLP notes, “When applicable, section 105(h) involves two separate and complex tests – somewhat mislabeled as (1) an eligibility test and (2) a benefits test. Both tests depend on whether the plan disproportionately favors “highly compensated individuals” relative to other employees.”
Section 105 plans, particularly those involving health reimbursement arrangements (HRAs) have to comply with HIPAA. While HIPAA primarily focuses on protecting health information, Section 105(h) focuses on ensuring fairness in the distribution of health benefits.
The nondiscrimination tests
Eligibility Test
The Eligibility Test makes sure that the right number of non-HCIs are eligible to participate in the plan. There are three ways a plan can pass this test:
- 70% Test: At least 70% of all non-excludable employees must benefit under the plan. This means that 70% of employees who are not excluded from the plan (such as part-time workers or those in a waiting period) must participate in the plan.
- 70% / 80% Test: At least 70% of all non-excludable employees must be eligible to participate in the plan, and at least 80% of those eligible must participate.
- Nondiscriminatory Classification Test: Employees must qualify for the plan under a classification set up by the employer that the IRS finds not to be discriminatory in favor of HCIs.
Benefits Test
The Benefits Test is a way to check that all benefits available under the plan are provided to all participants on the same terms. It means that HCIs cannot receive better benefits or be required to make lower contributions than non-HCIs. For example, if a plan offers a higher annual limit for HCIs than for non-HCIs, it would fail this test.
Defining highly compensated individuals
HCIs are identified as individuals who are among the five highest officers, shareholders owning more than 10% of the employer's stock, or among the highest paid 25% of all employees. The definition is a way to ensure that self-insured plans do not discriminate in favor of these individuals by giving them better benefits or eligibility.
The relation to HIPAA
Section 105 plans, as defined by HIPAA, are considered group health plans. It also plays a role in the reimbursement processes Section 105 plans perform. An instance where this occurs is when an employee submits a medical expense claim for reimbursement, and the organization processing the claim receives protected health information (PHI). This means employers or third-party administrators have to protect PHI. It sets the requirement for compliance with HIPAA and the Section 105 (h) testing criteria.
FAQs
Do Section 105 plans need to provide employees with a notice of privacy practices under HIPAA?
While not explicitly stated in the search results, generally, group health plans like Section 105 plans must provide a Notice of Privacy Practices to participants.
Can Section 105 plans share employee health information with other departments within the company?
Generally, HIPAA prohibits sharing PHI without proper authorization, so sharing within the company should be limited to those who need it for plan administration and should be done securely.
How long must Section 105 plans keep records of employee health information?
While HIPAA does not specify a retention period for PHI, it is recommended to keep records for at least as long as required by other laws, such as ten years for tax purposes.
Kirsten Peremore
