Section 105(h) Nondiscrimination Rules

Internal Revenue Code (Code) Section 105(h) contains nondiscrimination rules for self-insured health plans. Under these rules, self-insured health plans cannot discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility or benefits.

  • The eligibility test looks at whether a sufficient number of non-HCIs benefit under a self-insured health plan.
  • The benefits test analyzes whether the plan provides HCIs with better benefits, either in terms of how the plan is designed or how it operates.

Benefits provided by a discriminatory self-insured health plan will be taxable to the HCI. Also, if the benefits are offered through a Section 125 cafeteria plan, the cafeteria plan nondiscrimination rules will impact whether contributions made by highly compensated employees are taxable.

The Section 105(h) nondiscrimination rules do not apply to fully insured group health plans. However, under the Affordable Care Act (ACA), nondiscrimination rules that are similar to the Section 105(h) rules are expected to apply to non-grandfathered fully insured plans in the future.

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