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Brown & Brown — Conference Presentation (February 2022)

53 slides from Brown & Brown's conference presentation, Feb 17, 2022

  1. Slide 1: This Webinar Will Start Momentarily

    This Webinar Will Start Momentarily. Thank you for joining us.

  2. Slide 2: Nondiscrimination Rules Overview

    Nondiscrimination Rules Overview February 17, 2022 Presented By: Presented by the Regulatory and Amanda Olimb & Scott Wold Legislative Strategy Group

  3. Slide 3: Disclaimer

    DISCLAIMER Brown & Brown, Inc. and all its affiliates, do not provide legal, regulatory or tax guidance, or advice. If legal advice counsel or representation is needed, the services of a legal professional should be sought. The information in this document is intended to provide a general overview o

  4. Slide 4: The Applicable Rules: An Overview

    The Applicable Rules: An Overview

  5. Slide 5: The Applicable Rules

    The Applicable Rules Cafeteria Plans • Overall nondiscrimination rules (Section 125) Benefit Plans • Self-insured health plans (Section 105) • Health care FSAs (Section 105) • Dependent care assistance plans (Section 129) • Fully-insured medical plans (ACA) • Group term life insurance (Section 79) B

  6. Slide 6: The Big Picture

    The Big Picture Cafeteria Plan (pre-tax plan) Provides relief from taxation of employee contributions Key EE Eligibility Contrib. & Benefits Concentration Self-Insured Dependent Pre-Tax HSA Health FSA Life Insurance Health Plan Care FSA Contributions Underlying • Eligibility • Eligibility • Eligibil

  7. Slide 7: The Basic Requirement

    The Basic Requirement Plans must not discriminate in favor of highly compensated or key employees, in terms of: • Eligibility • Contributions • Availability of Benefits • Plan Operation The plan must be nondiscriminatory on each day of the plan year: • As tested on the last day of the plan year (Pro

  8. Slide 8: Our Focus for Today

    Our Focus for Today Cafeteria Plan Nondiscrimination Tests Dependent Care Assistance (DCAP) Tests • Eligibility tests • Eligibility test • Contributions and benefits test • Contributions and Benefits test • Key employee concentration test • More-than-5% Owners Concentration test Health FSA Nondiscri

  9. Slide 9: Cafeteria Plans

    Cafeteria Plans

  10. Slide 10: Partners and Sole Proprietors

    Partners and Sole Proprietors Sole proprietors, partners and shareholders of a Subchapter-S corporation holding more than 2% ownership are not employees under the code • They are ineligible to participate in the employer’s cafeteria plan and participate in benefit plans on an after-tax basis (so non

  11. Slide 11: Cafeteria Plans (§125)

    Cafeteria Plans (§125) Why the Rules Exist: §125 Salary Reduction Plans: • Provide tax-favored benefits to encourage employers Tax-favored treatment of employee contributions to provide benefits to rank-and-file employees for employer-sponsored qualified benefits • Prevent plans from providing highl

  12. Slide 12: Cafeteria Plans (§125): Who Is a Highly Compensated Employee

    Cafeteria Plans (§125) W H O I S A H I G H LY C O M P E N S AT E D E M P L O Y E E S ( H C E ) ? • An officer of the company (based on facts and • An employee earning more than a threshold amount circumstances, not job title) and, if elected by employer, was in the top 20% » Determined based on prec

  13. Slide 13: Cafeteria Plans (§125): Who Is a Key Employee

    Cafeteria Plans (§125) WHO IS A KEY EMPLOYEE? • An officer earning $185,000 or more in 2021 ($200,000 or more in 2022) » Subject to a maximum number of officers • A 5% or more owner • A 1% or more owner with compensation of $150,000 (not indexed) • Based on preceding plan year data • Ownership attri

  14. Slide 14: Nondiscrimination Rules

    Nondiscrimination Rules Generally, include in testing all employees who are not in an excludable class – regardless of eligibility to participate • Excludable classes of employees: » Employees subject to a collective bargaining agreement » Non-resident aliens with no U.S.-sourced income » Former emp

  15. Slide 15: Eligibility Rule

    Eligibility Rule “ “In the case of a highly compensated participant,” the exclusion from gross income “shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of highly compensated participants as to eligibility to participate” Code §125(b)(1)(A)) Purpose

  16. Slide 16: Eligibility Tests

    Eligibility Tests Measures: • Length of service (employment requirement) – same » Sufficient ratio of non-HCEs to HCEs eligible to for all employees? participate in the cafeteria plan (using safe • Entry date requirement harbor percentage test or unsafe harbor percentage test) • Benefits available?

  17. Slide 17: Eligibility Tests

    Eligibility Tests Eligibility Requirements: • Are all employees eligible to participate subject to the same waiting period? Entry Date Requirements: • Is the entry date the same for all classes of employees? • If not eligible earlier: Any employee who has completed three years of service who has sat

  18. Slide 18: Safe/Unsafe Harbor Percentage Tests

    Safe/Unsafe Harbor Percentage Tests • Determine the Plan's Non-HCI Concentration Percentage • Determine the Safe Harbor % From the Nondiscriminatory Classification Table A classification is not discriminatory for a plan year • If the plan's Ratio Percentage is 50% or more, the plan if, and only if,

  19. Slide 19: Table

    Table Non-HCI Concentration Safe Harbor Unsafe Harbor Percentage Percentage Percentage Example: 0–60 50.00 40.00 Non-HCI 61 49.25 39.25 concentration % is 65%. Safe Harbor 62 48.50 38.50 % = 46.25%. 63 47.75 37.75 Generally, the greater the 64 47.00 37.00 concentration of non- HCIs, the easier it is

  20. Slide 20: Example

    Example Employer does not allow union employees in plan but did bargain for benefit. 100 employees, 60 union 1 2 3 4 (No 125 plan for union employees) 40 in testing group: 16 HCEs, 24 NHCEs What percentage What percentage What is the Is the ratio 16 HCEs are eligible of the NHCEs of the HCEs ratio o

  21. Slide 21: Contributions & Benefits Test

    Contributions & Benefits Test The safe harbor from constructive receipt “shall not • Utilization: Do the HCEs actually take benefits (or apply to any benefit attributable to a plan year for which employer contributions) disproportionately when the plan discriminates in favor of…highly compensated co

  22. Slide 22: Key Employee Concentration Test

    Key Employee Concentration Test The income exclusion does not apply to any benefit for Collectively-bargained plans, and plans of which the qualified benefits provided to key employees governmental employers, are not subject to exceed 25% of qualified benefits provided for all the 25% key employee c

  23. Slide 23: Example

    Example Employer Key EEs Pre-Tax Deductions Contribution 1 3,000 2,000 Non-Key Pre-Tax Employer 2 1,000 2,000 EEs Deductions Contribution 3 5,000 2,000 1 500 2,000 Total 9,000 6,000 2 1,500 2,000 3 4,000 2,000 4 0 2,000 1 2 3 4 5 0 2,000 6 1,000 2,000 What is the total What is the total What percent

  24. Slide 24: Safe Harbors

    Safe Harbors Premium Only Plan Safe Harbor Safe Harbor for Plans Providing Medical • If met, plan satisfies the Contributions & Benefits and Coverage Key Employee Concentration tests • If met, plan satisfies Contributions and Benefits test • Applies if following conditions satisfied: • Employer cont

  25. Slide 25: Self-Insured Health Plans & Health FSAs

    Self-Insured Health Plans & Health FSAs

  26. Slide 26: Self-Insured Health Plans (§105-106)

    Self-Insured Health Plans (§105-106) Plans Subject to the Rule: Sources of Applicable Law: • Self-insured medical, dental and vision plans (funded • §105: determines whether benefits received under or unfunded) accident and health plans for employees, former employees, spouses and dependents can be

  27. Slide 27: Highly Compensated Individual (HCI)

    Highly Compensated Individual (HCI) One of five highest-paid officers More than 10% shareholder (at the time the benefit is • “Officer” not specifically defined in the regulations, provided during the plan year) but look at responsibilities, not just job titles) in the • Attribution rules apply (e.g

  28. Slide 28: Potential Discrimination Problems

    Potential Discrimination Problems Treating separate employee groups Based on: differently: • Different groups of eligible employees, by: • Plan eligibility » Job classification (salaried vs. hourly, executives vs. non-executives, part-time vs. full-time) • Different entry dates (waiting periods) or

  29. Slide 29: Nondiscrimination Tests

    Nondiscrimination Tests Self-Insured Health Plan Nondiscrimination Tests 1 Eligibility Test 2 Benefits Test Eligibility test excludable employees (if not • Employees who have not attained age 25; participating): • Part-time or seasonal employees; • Employees who have not completed three years of • C

  30. Slide 30: Eligibility Test

    Eligibility Test Measures • Length of service (employment requirement) – Same for all employees? Purpose • Entry date requirement To determine whether an appropriate mix of HCEs and non-HCEs is • Nondiscriminatory classification test requiring: eligible for benefits » Objective business classificati

  31. Slide 31: Eligibility Test

    Eligibility Test Does the plan benefit: • At least 70% of all employees (70% “ test), or “A self-insured medical reimbursement plan • 80% or more of all employees who are satisfies the requirements of [the discrimination eligible to benefit, if 70% or more are rules] only if…the plan does not discri

  32. Slide 32: Benefits Test

    Benefits Test “ “ “A self-insured medical reimbursement plan satisfies “A self-insured medical the requirements of [the discrimination rules] only reimbursement plan does not meet if…the benefits provided under the plan do not the [Benefits Test] unless all benefits discriminate in favor of particip

  33. Slide 33: Benefits Test

    Benefits Test • Plan must not discriminate, either on its face “Permitted” Discrimination (based on design) or in actual operation • Fully insured health plans • Only plan participants are tested • Plan covering Executive Physicals at no cost • All benefits provided to HCIs must be provided to all o

  34. Slide 34: Dependent Care FSAs

    Dependent Care FSAs

  35. Slide 35: Statutory Provisions

    Statutory Provisions “ “ “The contributions or benefits provided “The program shall benefit employees under the plan shall not discriminate in who qualify under a classification set up favor of employees who are highly by the employer and found by the compensated employees (within the Secretary not

  36. Slide 36: Statutory Provisions

    Statutory Provisions “ “Not more than 25 percent of the amounts paid or incurred by the employer for dependent care assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more

  37. Slide 37: Highly Compensated Employees

    Highly Compensated Employees W H O I S A H I G H LY C O M P E N S AT E D E M P L O Y E E ( H C E ) ? • An employee who owns 5% or more of the voting power or value of all classes of stock of the employer in the current or preceding plan year » Attribution rules apply • An employee earning $130,000 o

  38. Slide 38: Dependent Care Assistance Plans (DCAPs) (§129)

    Dependent Care Assistance Plans (DCAPs) (§129) Eligibility Test 5% Owner Concentration Test • Ensures that a reasonable percentage of non-HCEs • Ensures that the total amount of dependent care are eligible to participate in the DCAP assistance provided to >5% owners and shareholders • If not enough

  39. Slide 39: Dependent Care Assistance Plans (DCAPs) (§129)

    Dependent Care Assistance Plans (DCAPs) (§129) Generally, includes testing all employees who are not in • Excludable employees for just 55% average benefits an excludable class test » Employees who earn less than $25,000 • Excludable classes of employees (not required to be included in testing) for

  40. Slide 40: Eligibility Test

    Eligibility Test Nondiscriminatory classification test requiring: • Objective business classification (not favoring HCEs) may be used to Purpose determine eligibility To determine whether • Sufficient ratio of non-HCEs to HCEs eligible to participate in the an appropriate mix of cafeteria plan (Safe

  41. Slide 41: Contributions & Benefits Test

    Contributions & Benefits Test Availability: Can HCEs get more plan benefits (or employer contributions) than non-HCEs? • Does the employer offer HCEs better benefits or the same benefits on better EXAMPLE 1 EXAMPLE 2 terms? HCEs are eligible to elect Employer matches full annual limit; non- dependen

  42. Slide 42: 5% Owners Concentration Test

    5% Owners Concentration Test No more than 25% of the benefits may be provided to shareholders or owners • Shareholders or owners owning more than 5% of the employer and their spouses and dependents • Includes terminated employees • Determines the total DCAP benefits and to ensure certain owners do n

  43. Slide 43: Example

    Example Total dependent care benefits 1 2 paid to all employees = $115,000 What is the total benefit What is maximum that may paid to all employees? be paid to 5% (or more) Benefits paid to 5% owners must owners of the company? not exceed $28,750 ($115,000 x 25% = $28,750) $115,000 $28,750 BROWN & B

  44. Slide 44: 55% Avg. Benefits Test

    55 Avg. Benefits Test Average benefits provided to non-HCEs must be at least 55% of benefits received by HCEs Code §129(d)(8): • “A plan meets the requirements of this paragraph if the average benefits provided to employees who are not [HCEs] under all plans of the employer is at least 55% of the av

  45. Slide 45: Example

    Example HCE NHCE 1 2 3 4 5 Benefits $25,000 $90,000 How many What is the How many What is the Using the test HCEs does the total value of NHCEs does total value of formula of the company benefits the company benefits average HCE 90 have? available to the have? available to the benefit times # of *mu

  46. Slide 46: If the Plan Is Discriminatory

    If the Plan Is Discriminatory If a plan discriminates, either on its face or in actual practice: • Highly compensated participants lose tax-favorable treatment » The benefits received under the DCAP are taxable income » Plan sponsors may correct by adjusting HCP and owner elections before the end of

  47. Slide 47: Life Insurance & Disability Plans

    Life Insurance & Disability Plans

  48. Slide 48: Life Insurance

    Life Insurance Nondiscrimination Requirements • Benefits test • May not discriminate in favor of “key” employees » Plan is discriminatory “unless the type and (slide 13) amount of benefits available under the plan do • Eligibility test - In general, a plan is discriminatory not discriminate in favor

  49. Slide 49: Disability Insurance

    Disability Insurance There are no nondiscrimination requirements specific to disability plans. • However, if paid for by employees on a pre-tax basis under the cafeteria plan, included in cafeteria plan nondiscrimination testing. BROWN & BROWN | 49

  50. Slide 50: Wrap-Up

    Wrap-Up

  51. Slide 51: Red Flags

    “Red Flags” Issues to look out for: • Providing different dates of entry for different classes of employees • Providing a greater benefit to HCEs • Reduced premium contributions based on age or years of service • Low utilization of the dependent care FSA by non-HCEs • Availability of benefits based

  52. Slide 52: HRCI and SHRM Credits

    HRCI and SHRM Credits This Program, ID No. 587105, has been approved for 1.00 HR (General) recertification credit hours toward aPHR™, aPHRi™, PHR®, PHRca®, SPHR®, GPHR®, PHRi™ and SPHRi™recertification through HR Certification Institute® (HRCI®). Brown & Brown is recognized by SHRM to offer Professi

  53. Slide 53: Find your solution at BBrown.com

    Find your solution at BBrown.com DISCLAIMER: Brown & Brown, Inc. and all its affiliates, do not provide legal, regulatory or tax guidance, or advice. If legal advice counsel or representation is needed, the services of a legal professional should be sought. The information in this document is intend

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