A client is considering a health reimbursement arrangement which will also provide retiree coverage. The employer has two classes of retirees – one eligible for benefits and the other group not eligible.

Any thoughts an how the nondiscrimition rules of Section 105(h) and 1.105-11©(3)(iii) would apply in this case?

Any opinions/guidance is appreciated.

Not knowing who's in the eligible and the excluded retiree classes, it's hard to say.

But if any retiree who was a highly compensated individual is entitled to any HRA retiree benefit greater than any retiree that was not a highly compensated individual, then you have to test under 105(h).

Nini:
Can you give us some insight on how the employer wishes to distinguish the two groups?
For example, length of service would seem to qualify, such as those employees serving for 10 years or more would qualify.
Also bear in mind that the recent HRA rollover provisions suggest that low users of medical expenses would have more available in their HRA accounts, as long as the contributions per employee were equal.
Is the employer willing to consider something other than an HRA for retiree benefits? I am thinking of a trust in which former employees make contributions.
Don Levit

Nini:
You may want to check out the Federal Register for Dec. 13, 2006, Part 3, Nondiscrimination and Wellness Programs in Health Coverage in the Group Market; Final Rules at http://edocket.access.gpo.gov/2006/pdf/06-9557.pdf.
On p. 75034, it states under Example 4: "Imposing additional eligibility requirements on former employees is permitted because a classification that distinguishes between current and former employees is a bona-fide employment-based classification that is permitted, provided that it is not directed at individual participants or beneficiaries. It is permissible to distinguish between former employees who satisfy the service requirement and those who do not, provided that the distinction is not directed at individual participants or beneficiaries. However, former employees who do not satisfy the eligibility criteria, may be eligible for continued coverage pursuant to COBRA or similar State law."
Don Levit

Hey, Don,

Glad you pointed out that there's HIPAA nondiscrimination issues as well as tax nondiscrimination rules that Nini will need to sort through.