Using event related brain potentials (ERPs), we examined the neurocognitive basis of phonological discrimination of phoneme /h/ in native English speakers and Francophone late second language (L2) learners, as a function of L2 proficiency and stimulus/task demands. In Experiment 1, native and non-native (L2 only) phonological contrasts were presented as syllables during a task that directed attention to phonological form. Phonological categorization was assessed with MMN, N2b and P3b effects. In Experiment 2, the same contrasts were presented as words/ pseudowords during a task that directed attention to semantics. Phonological discrimination was assessed with N400 pseudoword effects. High proficiency L2 learners displayed similar ERPs as native speakers in both experiments; low proficiency L2 learners showed discrimination of non-native contrasts in Experiment 1 (directed attention task) only. Thus, L2 phonological discrimination by late learners may depend on stimulus/task factors and occurs in a wider range of contexts as L2 proficiency improves.