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Brown & Brown — Technical Presentation (June 2024)
54 slides from Brown & Brown's technical presentation, Jun 20, 2024
Slide 1: This Webinar Will Start Momentarily
This Webinar Will Start Momentarily. Thank you for joining us.
Slide 2: Nondiscrimination Rules Overview
Nondiscrimination Rules Overview June 20, 2024 Presented By: Presented by the Regulatory and Christopher Bao & Dan Brady Legislative Strategy Group
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
Slide 4: The Applicable Rules: An Overview
The Applicable Rules: An Overview
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
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
Slide 7: Our Focus for Today
Our Focus for Today Cafeteria Plan Nondiscrimination Tests Dependent Care Assistance (DCAP) Tests • Eligibility test • Eligibility test • Contributions and benefits test • Contributions and Benefits test • Key employee concentration test • More-than-5% Owners Concentration test Health FSA Nondiscrim
Slide 8: 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 BROW N & BROW N | 8
Slide 9: 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
Slide 10: Cafeteria Plans
Cafeteria Plans
Slide 11: 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
Slide 12: Cafeteria Plans (§125)
Cafeteria Plans (§125) Why the Rules Exist: §125 Salary Reduction Plans: • To encourage employers to provide tax-favored Tax-favored treatment of employee contributions benefits to rank-and-file employees for employer-sponsored qualified benefits • Prevent plans from providing highly compensated and
Slide 13: Cafeteria Plans (§125): 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 ( 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 preced
Slide 14: Cafeteria Plans (§125): Key Employee
Cafeteria Plans (§125) WHO IS A KEY EMPLOYEE? • An officer earning $215,000 or more in 2023; $220,000 or more in 2024 » 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 attrib
Slide 15: 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 emplo
Slide 16: 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
Slide 17: Eligibility Tests
Eligibility Tests Measures: • Length of service (employment requirement) – • Sufficient ratio of non-HCEs to HCEs eligible to same for all employees? participate in the cafeteria plan (using safe harbor percentage test or unsafe harbor • Entry date requirement percentage test) • Nondiscriminatory cl
Slide 18: 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
Slide 19: 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 A classification is not Classification Table discriminatory for a plan year if, and only if, the group of employees » If the plan's Ratio Percentage is
Slide 20: Table
Table Non-HCI Concentration Safe Harbor Unsafe Harbor Percentage Percentage Percentage Example 0–60 50.00 40.00 61 49.25 39.25 Non-HCI concentration 62 48.50 38.50 % is 65%. Safe Harbor % = 46.25%. 63 47.75 37.75 Generally, the greater 64 47.00 37.00 the concentration of 65 46.25 36.25 non-HCIs, the
Slide 21: 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 What What is the Is the ratio • 16 HCEs are eligible percentage of percentage of ratio of eligible wi
Slide 22: Contributions & Benefits Test
Contributions & Benefits Test The safe harbor from constructive receipt “shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of…highly compensated participants” as to contributions and benefits. (Code §125(b)(1)(B)) • Availability: Can HCEs get more p
Slide 23: 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 the exceed 25% of qualified benefits provided for all 25% key employee c
Slide 24: Example
Example Employer Non-Key Pre-Tax Employer Key EEs Pre-Tax Deductions Contribution EEs Deductions Contribution 1 3,000 2,000 1 500 2,000 2 1,000 2,000 2 1,500 2,000 3 5,000 2,000 Total 9,000 6,000 3 4,000 2,000 4 0 2,000 5 0 2,000 1 2 3 4 6 1,000 2,000 7 2,000 2,000 What is the total What is the tota
Slide 25: Safe Harbors
Safe Harbors Premium Only Plan Safe Harbor Safe Harbor for Plans Providing Medical Coverage • Applies if following conditions satisfied: • Employer contributions under plan must meet a 100% » Plan offers as its sole benefit an election / 75% test and an excess contribution test between cash and paym
Slide 26: Self-Insured Health Plans & Health FSAs
Self-Insured Health Plans & Health FSAs
Slide 27: 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 • §105: determines whether benefits received plans (funded or unfunded) under accident and health plans for employees, former employees, spouses and • Health FSAs (lim
Slide 28: Highly Compensated Individual (HCI)
Highly Compensated Individual (HCI) One of five highest-paid officers More than 10% shareholder (at the time the benefit • “Officer” not specifically defined in the regulations, is provided during the plan year) but look at responsibilities, not just job titles) in the • Attribution rules apply (e.g
Slide 29: Potential Discrimination Problems
Potential Discrimination Problems Treating separate employee groups differently: Based on: • Plan eligibility • Different groups of eligible employees, by: » Job classification (salaried vs. hourly, executives • Different entry dates (waiting periods) or vs. non-executives, part-time vs. full-time)
Slide 30: Nondiscrimination Tests
Nondiscrimination Tests Self-Insured Health Plan Nondiscrimination Tests 1 Eligibility Test 2 Benefits Test Eligibility test excludable employees (if not participating): • Employees who have not completed three years of • Part-time or seasonal employees; service; • Collectively bargained employees;
Slide 31: 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 • Nondiscriminatory classification test requiring: HCEs and non-HCEs is eligible for benefits » Objective business classificati
Slide 32: Eligibility Test
Eligibility Test “ Does the plan benefit: • At least 70% of all employees (70% test), or “A self-insured medical reimbursement plan satisfies the • 80% or more of all employees who are eligible to benefit, requirements of [the discrimination if 70% or more are eligible (70% / 80% test), or rules] on
Slide 33: 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
Slide 34: 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 (Section 125 cafeteria plan rules will still apply) • Only plan participants are tested • Plan covering Executive Physicals at no cost • All
Slide 35: Dependent Care FSAs
Dependent Care FSAs
Slide 36: 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
Slide 37: 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
Slide 38: 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 • Compensation threshold: $150,0
Slide 39: 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 does not exceed
Slide 40: Dependent Care Assistance Plans (DCAPs) (§129)
Dependent Care Assistance Plans (DCAPs) (§129) Generally, includes testing all employees who are not in an excludable class • Excludable classes of employees (not required to be included in testing) for purposes of eligibility and 55% average benefits tests: » Employees not included in a dependent c
Slide 41: 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 cafeteria an appropriate mix of plan (Safe
Slide 42: 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 terms? EXAMPLE 1 EXAMPLE 2 HCEs are eligible to elect full Employer matches dependent care annual limit
Slide 43: 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
Slide 44: Example
Example 1 2 Total dependent care benefits paid to all employees = $115,000 What is the total What is maximum that benefit paid to all may be paid to 5% (or Benefits paid to 5% owners must not employees? more) owners of the exceed $28,750 company? ($115,000 x 25% = $28,750) $115,000 $28,750 BROW N &
Slide 45: 55% Avg. Benefits Test
55% Avg. Benefits Test Average benefits provided to non-HCEs must be at least 55% of average 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%
Slide 46: Example
Example 1 2 3 4 5 HCE NHCE How many What is the How many What is the Using the test Benefits $25,000 $90,000 HCEs does total value of NHCEs does total value of formula of the the company benefits the company benefits average HCE have? available to have? available to benefit times 90* must the HCEs?
Slide 47: 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
Slide 48: Life Insurance & Disability Plans
Life Insurance & Disability Plans
Slide 49: Life Insurance
Life Insurance Nondiscrimination Requirements • Benefits test • May not discriminate in favor of “key” employees (slide 14) » Plan is discriminatory “unless the type and amount of benefits available under the plan do not discriminate in favor of • Eligibility test - In general, a plan is discriminat
Slide 50: 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. BROW N & BROW N | 50
Slide 51: When should testing be done?
ep When should testing be done? 0
Slide 52: Testing Requirements
Testing Requirements Is testing required? The plan must be nondiscriminatory on each day of the plan year • “(1) In general. Nondiscrimination testing must be performed as of the last day of the plan year, taking into account all non-excludable employees (or former employees) who were employees on a
Slide 53: HRCI and SHRM Credits
HRCI and SHRM Credits This Program, ID No. 663020, 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
Slide 54: 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