Section 105(h) Non Discrimination Rules For Fully Insured Plans

Discrimination in regards to benefits and eligibility in favor of highly compensated workers by self funded health plans has long been prohibited by Section 105(h) of the Internal Revenue Code. Failing to meet the mandates will cause taxation for the highly compensated personnel.

For example, suppose a highly compensated executive is promised benefits for life under a self funded health plan. The employee incurs $100,000 of medical costs in connection with an illness. The $100,000 of benefits will then turn out to be taxable income under Section 105(h). This is the reason that most employee benefit lawyers warn organizations that have self-insured plans not to create exclusive eligibility rules only for higher-ranking executives in connection with retirements or separation of employment.

For policy years beginning Sept 23, 2010, insured plans are now going to have to comply with these rules because of the Patient Protection and Affordable Care Act. Plans that were in existence on March 23, 2010 will be grandfathered and not subjected to the new rules as long as they don’t make significant changes that could cause them to lose their status.

PPACA made this change by including the nondiscrimination rules in the Public Health Service Act, as well as in ERISA. The rules can also be found under the excise tax provision of the Internal Revenue Code but it isn’t under the income tax provision section.

Because of this, the consequences of not meeting the requirements will be different for insured group health plans than taxation to the highly compensated employee, as under self funded plans. For both insured and self funded plans, a plan will be prohibited from discriminating.

There will be no tax liability for the highly compensated employee if an insured plan is in violation of Section 105(h). An excise tax of $100.00 per day per participant will assessed to the employer sponsoring the insured health plan if it fails the non discrimination test.

Contact Kirby Horton at for additional information.