8798 / What nondiscrimination requirements apply to self-insured health plans?

Benefits received pursuant to a self-insured plan are generally excludable from an employee’s gross income. Despite this, if a self-insured medical expense reimbursement plan or the self-insured part of a partly-insured medical expense reimbursement plan discriminates in favor of highly compensated individuals, certain amounts paid to the highly compensated individuals will be taxable to those highly compensated individuals.

A medical expense reimbursement plan cannot be implemented retroactively because, if this were permitted, the nondiscrimination requirements of IRC Section 105 would be ineffective.¹

A self-insured plan may not discriminate in favor of highly compensated individuals either with respect to eligibility to participate or benefits.

Eligibility