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Section 105 Plan Compliance: What You Need to Know [Infographic]

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You can still set up a plan for 2020!

Just set up and fund a plan for 2020 before you file your tax return.

Non-discrimination testing applies to self-insured medical reimbursement plans that allow employees to pay their premiums on a pre-tax basis. Common plans that are required to undergo non-discrimination testing include HRA’s, self-funded medical plans, and medical expense reimbursement plans (MERP’s).

Most Section 105 plans must undergo non-discrimination testing, but a qualified plan administrator can verify if a business’ Section 105 plan must do so. Non-discrimination testing ensures that medical plans are available to all employees, not just business owners or highly paid executives. If the Section 105 plan fails non-discrimination testing, employees do not lose their tax-free benefits, but management and business owners may lose theirs, or be otherwise affected through fines and penalties.

Non-discrimination testing involves two tests: eligibility and benefits. The eligibility test checks to ensure that regular employees are eligible to receive the benefit of the plan. To pass this test, the company must meet one of three requirements:

  • The 70% test – 70 percent or more of non-excludable employees benefit under the plan
  • The 70/80% test – 70% or more of all non-excludable employees are eligible to benefit under the plan, and the plan benefits 80% or more of those employees who are eligible to benefit
  • The nondiscriminatory classification test – The plan benefits a group of individuals that is both reasonable and non-discriminatory. A reasonable group of individuals could be defined by part-time versus full-time work, their living location, or whether they receive hourly wages or a salary.

The benefits test involves an examination of the benefits themselves and how they are applied to business owners and managers versus regular employees. To pass this test, businesses must meet the following requirements:

  • The plan cannot charge more for premiums or deductibles to regular employees than business owners or management. For example, a plan cannot allow management to pay only 50% of their premiums, while regular employees are charged 75%.         
  • Benefits available must be the same for both regular employees and management / business owners.
  • The plan cannot have different waiting periods for management / business owners and regular employees. The waiting period must be the same across the board.

Penalties for not complying with the non-discrimination testing, or for failing the non-discriminatory testing, is different for self-insured and fully insured plans. Business owners or management-level employees under a self-insured plan will lose their tax-free benefits. They will have to include their benefits in taxable income. Insured plans that are found to be discriminatory will be fined $100 per day, to a maximum of $36,500, for each employee that is found to be discriminated against. This fine can stretch to $500,000 per year for the business, until it redesigns the plan so that it is no longer discriminatory.

Section 105 Plan IRS Reporting

Companies that offer Section 105 plans must submit Form M-1 by March 1st of the calendar year following the calendar year for which the report is required. Form M-1 provides specific information on the plan, including the following:

  • What type of coverage is provided
  • Insurance coverage information
  • Number of participants covered in the plan
  • Information about any enforcement actions
  • Information regarding compliance with Part 7 of ERISA, including any litigation alleging non-compliance

The form must be filed electronically to the U.S. Department of Labor, Employee Benefits Security Administration.

At least thirty days prior to offering a Section 105 plan, the business must file Schedule M-1 to comply with regulations. Only companies that plan to offer medical coverage benefits (not just disability or life insurance benefits) are required to file Form M-1.

If major changes occur during a calendar year that affect the status of the plan, a Form M-1 must be filed. Major changes can include coverage for employees that are located in another state or an increase in the number of employees covered by the plan by more than 50% from the preceding calendar year. If the plan experiences a material change as defined in their plan documents, the Form M-1 must also be filed.

Companies must ensure that they file Form M-1 completely and accurately. EIN numbers and contacts for any other individuals or companies who have control or authority over the Section 105 plan or its assets should be given. Information regarding every state in which the Section 105 plan operates must be listed. At the end of the filing process, a confirmation number will be given which should be retained until the following year, since it will be required for the new filing.

Section 105 Plan IRS Compliance

Companies are required to file either Form 5500, Form 5500-SF or Form 5500-EZ with the IRS depending upon the number of participants in the plan. This form provides general information on the plan, including the name of the plan, plan administrator information, number of people covered under the plan, total assets available in the plan, contributions that were made towards the plan during the year, and certain compliance and funding questions.

Companies that offer the plan to more than 100 participants must file Form 5500, which is quite complicated and requires outside actuarial valuation that must be done by an outside qualified party. Form 5500-SF can be completed by smaller businesses with less than 100 participants. It must be filed electronically. Form 5500-EZ is available to one-person (or one-person plus spouse) plans. It must be filed on paper and submitted to the IRS. However, if the company would rather file electronically, the owner may submit Form 5500-SF instead.

Typical schedules included in the Form 5500 filing include Schedule A, which details premium and agent commissions. This schedule does not apply to self-funded plans. Schedule C is sometimes required and lists the fees associated with the plan. Form 5500, Form 5500-SF and Form 5500-EZ must be filed by the last day of the seventh month following the end of the plan year.

In summary, it is extremely important that businesses that are considering a Section 105 plan consult with a qualified plan administrator to ensure that their plan meets the requirements for non-discriminatory testing. The plan administrator can insure the plan is set up properly and the necessary testing requirements.

Don’t let these compliance issues scare you. Section 105 plans are great plans for healthcare reimbursement. In addition, setting up a plan is not that challenging.