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PLAN DESIGN HELPS PREVENT PENALITIES

Background

An employer's organization consisted of seven separate, wholly-owned companies, classified into three different groups. Each group maintained separate benefit plans and had different waiting periods for coverage and classifications of employees. Frost was hired on a project basis to perform the IRC §105(h) nondiscrimination testing*, as well as provide a plan cost evaluation of each of the three separate self-funded medical plans for purposes of establishing proper accrual/funding rates for the plans.

Approach

IRC §105(h) Nondiscrimination Testing: The three plans were tested together (on a controlled group basis) but because they were slightly different in waiting periods and employee classifications, each of the groups had to be tested separately in order to meet the requirements. One of the three groups did not meet the requirements due to differences in eligibility requirements for salaried and hourly employees. Plan design recommendations were made so that the employer could avoid the issue in future years.

Plan Cost Evaluation: Historical claims information was used to project costs for each of the three separate plans individually and then on a combined basis for the upcoming plan year. Accrual/funding rates were established for the self-funded plans using a 3-tier rate structure (employee only, employee + 1 dependent, employee + 2+dependents) as well as a 4-tier rate structure [employee only, employee + spouse, employee + child(ren), employee + family]. An employee contribution strategy was established based on known industry contribution norms and employer cost objectives.

Result

We provided the employer with a report that:

  • Satisfied their annual nondiscrimination testing requirements and provided specific guidance on needed plan design changes. Had the issue not been discovered in time, the benefits would have become taxable income to the company's highly-compensated employees
  • Provided self-funded plan accrual/funding rates to properly account for their upcoming year plan cost. The information was also used to establish employee contributions to meet employee benefit plan objectives and to establish their market position relative to competitors' employer benefit plan offerings, thereby becoming more of a valuable employee retention tool and ensuring longer-term financial credibility for the overall program

*Note:
Nondiscrimination testing should be done at least once a year to make sure a plan does not discriminate in favor of highly-compensated employees with respect to benefit eligibility.

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