105(h) Nondiscrimination FAQs

How are HCI’s defined?

HCIs fall into the following categories under 105h Testing:

• The highest paid 25% of all non-excludable employees. 
• The five highest paid officers. 
• The more-than-10% shareholders 

*Thus, by definition, at least 25% of all nonexcludable employees are HCIs. NOTE: This definition is not the same as the HCI for Code 125 testing rules.

What are “Excludable” employees?

"Excludable" employees are defined as: 

• Employees who have not completed three years of service 
• Employees under age 25
• Part-time or seasonal employees 
• Non-resident aliens with no U.S. source income 

However, if an employer does not exclude all employees in an excludable category, then no employees in that category are considered to be excludable. For example, an employer could not exclude some employees who have less than three years of service but not others, and it could not exclude some employees who are under age 25 but not others.

What are the different types of tests we need to run?

There are two tests which both must be satisfied in order to pass the 105(h) Test. 

• One, the Eligibility Test focuses on whether enough non-HCIs "benefit" under the health plan. The term "benefit" generally means that the employee is actually enrolled in the plan (and not merely eligible to enroll). The Eligibility Test includes: 
  • 70 Percent Test - is satisfied if the plan benefits 70 percent or more of all employees.
  •  70 Percent / 80 Percent Test - the employer must first verify that 70 percent or more of all employees are "eligible" to benefit under the plan. If so, the plan must actually benefit 80 percent or more of all those eligible employees. Nondiscriminatory Classification Test - is passed if, based on certain "facts and circumstances," the plan does not discriminate in favor of HCI eligibility. 
• Two, the Benefits Test is generally passed if the same benefits are provided to both HCIs and non-HCIs. The Benefits Test generally would be violated if an employer offered better eligibility terms for HCIs than non-HCIs (e.g., immediate eligibility versus 90-day waiting period). It also would be violated if benefits increase with years of service or compensation (e.g., if an HRA provided $100 in benefits for each year of employment).

Why do we need to do 105(h) testing?

Code section 105(h) contains the rules applicable to self-insured plans. It does not prohibit all types of discrimination. It prohibits self-insured group health plans from discriminating in favor of "highly compensated individuals" (HCIs) and against non-HCIs as to Eligibility to participate and as to Benefits available under the plan. *PPACA rules now include testing for insured medical plans under 105h as well. The two nondiscrimination tests under 105(h) are: 

• The Eligibility Test, which is intended to ensure that "enough" non-HCIs benefit from the plan. Plan can pass if one of the following is met: Benefits 70% of all employees; Benefits 80% of employees eligible to participate if at least 70% of employees are eligible, or Benefits a nondiscriminatory classification of employees. 
• The Benefits Test, is intended to ensure that all participants are eligible for the same benefits and that HCIs are not receiving better benefits. Same benefits options should be available to all eligible employees and no disparate waiting periods.

What information needs to be completed?

Tab 1: 105(h) Data - You will need to list all employees that have been employed during the plan year that is being tested and complete all columns on this page, as they apply to your company and employees. 

Tab 2: Subjective Questions - You will need to Answer the Questions Starting with what year is being tested. Please Complete all following Yes/No Questions as they apply to your company. 

*Please Note: There is no action required in the Definitions Section of this Tab. This is only listed as helpful information to be used as a reference.

Where can I find more detailed information for what is needed on Tab 1?

Please reference Tab 3: Data Explanations. - This Tab will provide a detailed breakdown of all information needed for each column on Tab 1: 105(h) Data. 

Tab 4: Answer Types -This tab will provide you with the accepted format for answers to be entered throughout this spreadsheet. 

*Please Note: DO NOT change, add, or remove any headers, Columns, or other forms of formatting on any tab of this spreadsheet or the testing software will not be able to accurately read your spreadsheet and may result in a failure.