Self-Insured Health Plan Nondiscrimination Rules
When a business pays for employee health benefits through a self-insured plan, the tax rules require that the plan not favor owners and highly paid employees. If it does, the favored group can owe tax on benefits that would otherwise be tax-free.
Who the Rules Protect and Who They Target
Who Is a Highly Compensated Individual
Under Treas. Reg. §1.105-11(d), a highly compensated individual is one of the five highest-paid officers, a shareholder owning more than 10 percent of the employer’s stock by value, or one of the highest-paid 25 percent of employees. Ownership counts family attribution under IRC §318.
The Eligibility Test
The plan must benefit at least 70 percent of employees, or 80 percent of eligible employees if 70 percent or more are eligible, or a classification of employees the IRS finds not discriminatory (§1.105-11(c)(2)). Certain groups, such as employees under 25 or with under 3 years of service, may be left out of the count.
The Benefits Test
Benefits available to highly compensated individuals must be available to all other participants, and employer-funded limits must be uniform without regard to age or years of service (§1.105-11(c)(3)).
These rules apply to self-insured plans under IRC §105(h). A fully insured group plan is generally outside this section, but level-funded and other self-funded arrangements should be checked.
Consequences for Owners and Executives
Discriminatory Benefits
If a benefit is discriminatory, the entire reimbursement of that benefit to a highly compensated individual is an excess reimbursement and taxable to them (§1.105-11(e)(2)).
Discriminatory Coverage
If eligibility fails, the taxable portion is the highly compensated individual’s reimbursements multiplied by the ratio of all highly compensated reimbursements to total reimbursements (§1.105-11(e)(3)).
Timing of the Tax
Excess reimbursements are included in income for the taxable year in which the plan year ends (§1.105-11(h)).
Cafeteria Plans
If the plan sits inside a Section 125 cafeteria plan, the excess amount is treated as a taxable benefit (§1.105-11(k)).
Common Problems for Closely Held Businesses
Carving Out a Rich Executive Benefit
A richer benefit or higher allowance for owners and executives is the classic way to fail the benefits test.
Excluding Too Many Staff
Limiting eligibility to owners and a few managers can fail the percentage and classification tests.
Assuming Level-Funded Means Insured
A level-funded plan typically runs as a self-funded plan with stop-loss coverage, so ask whether §105(h) applies.
Never Testing the Plan
Because the test is run for each plan year, the first time anyone checks is often when an auditor asks.
Nondiscrimination Questions
Does this apply to my fully insured plan?
Section 105(h) applies to self-insured plans. A fully insured plan is generally outside its reach, though other nondiscrimination rules may apply to specific benefits.
Who counts as a highly compensated individual in a small company?
Often the owners. A shareholder owning more than 10 percent, and anyone treated as owning that much through family attribution, is included.
Can I give owners a better plan?
Not without risk. Benefits must be available on the same basis, and uniform limits cannot vary by age or service.
What do I do if the plan fails?
Talk to your CPA about the tax on excess reimbursements and about redesigning the plan before the next plan year.
Does an HRA face these rules?
Many HRAs are self-insured plans, so yes. See ICHRA and QSEHRA Tax Treatment for Owners.
Where These Rules Come From
26 CFR §1.105-11 · IRC §105 · IRC §318 · IRC §125
CFH are licensed insurance brokers, not tax advisors. This page is general information, not tax advice, so confirm your situation with your CPA or tax advisor. Our clients also have access to CPAs and attorneys through the firm.
Related Guides
Related reading: Tax Benefits of Group Health Insurance for Owners · Business Owner Health Insurance Tax Guides · ICHRA and QSEHRA Tax Treatment for Owners · S Corporation Owners With More Than 2 Percent · Employee Tax Exclusion for Employer-Paid Health Insurance · Section 125 Tax Savings Calculator · Section 105(h) Nondiscrimination For Self-Insured Health Plans · Section 105(h) Nondiscrimination for Self-Insured Health Plans
Send us your renewal.
We’ll tell you whether it looks competitive, where we see opportunity, and the five questions we’d put to your carrier. No cost, and no obligation to move anything.
The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents, two more if your group is 50 or more. Nothing else; every extra one is a reason to postpone.
An independent employee benefits consulting firm. We look at the entire benefits program — cost, plan performance, risk and administration.
Switch to CFH. Unhappy with your broker? Your employees won’t notice. You will. →
Cookies on This Site
We use cookies to keep the site working properly and to understand how it is used. You can decline anything that is not essential. See our Privacy Policy for the detail.
- Essential — needed for the site to load and for you to move around it. These cannot be switched off.
- Analytics — tell us which pages get read, so we know what is worth writing more of.
- Advertising — set by third parties such as ad and social platforms to measure and target campaigns.