Health care reform has really opened up the flood gates of discussion about discrimination testing.  The new regs will (when finally written) make Code Section 105(h) applicable to insured plans.  But some sponsors of self-funded health plans might have forgotten that 105(h) already applies to them.  If your plan is self-funded, you should already be doing discrimination testing.  Let's review the requirements.

Self-funded plans (and cafeteria plans, too) have to do annual discrimination testing to make sure that they remain "qualified" as employee benefit plans.  If they are disqualified, then the benefit provided would be taxable as income to participants, and also subject to withholdings by the employer.  So the penalties for disqualification can be pretty steep.  That's why it is important to test plans to make sure they pass muster and remain qualified.

The first test is the "Benefits Test" that tests to make sure the plan does not discriminate in favor of highly compensated employees ("HCEs").  It essentially looks to see that everyone receives the same benefits.  The second test is the "Eligibility Test" that tests to see that the plan is available to the correct percentage of employees and that, again, it does not discriminate in favor of HCEs.  The third test is one not commonly discussed, but it tests "Non-Discrimination in Operation."  This happens when plans might appear to be non-discriminatory, but in their practical operation, they only benefit HCEs.

The point here is not to describe each test in detail because I don't want anyone to assume they pass based on what they read about the tests.  These tests are very detailed and is essential that sponsors of self-funded plans have their plans tested.  Don't assume that because you offer coverage to everyone, your plan passes.  Just like you test your 401(k) plan, you have to test your cafeteria plans and your self-funded health plans.