Health Plan Discrimination Prohibited
Up until the passing of the Affordable Care Act (ACA), fully insured plans enjoyed protection from the non-discrimination rules under IRS Code 105(h). Now, beginning on or after September 23rd, 2010, the ACA makes non-grandfathered fully insured plans subject to the rules under Section 105(h), rules that self-funded plans have been subject to for many years.
Which fully insured plans does this apply to?
The rule applies to non-grandfathered fully insured plans only. Grandfathered fully insured plans do not have to comply with 105(h).
What are highly compensated individuals?
"Highly compensated individuals" (HCIs) include three groups of employees:
• The five highest-paid officers of the company;
• Shareholders who own more than 10% of the value of stock of the employer’s stock (not applicable to tax-exempt organizations), and;
• The highest-paid 25% of all employees (with some exceptions, including employees who have not completed three years of service, collectively bargained employees, and part-time employees).
What must a plan do to ensure they are not discriminating in favor of HCIs?
Section 105(h) contains guidance on what practices are considered discriminatory. While not an exhaustive list, among the guidance is the following:
• Benefits provided for HCIs and their dependents must be provided on the same basis for all other participants and their dependents.
• Maximum limits attributable to employer contributions must be uniform for all participants and dependents and may not be modified by reason of a participant's age or years of service.
• The type or the amount of benefits subject to reimbursement under the plan cannot be in proportion to employee compensation.
• Plans cannot make being an HCI a requirement for eligibility to participate in a plan.
• Plans cannot offer any benefit that favor HCIs on its face.
• Plans cannot discriminate in favor HCIs in actual operation of the plan. (Whether a plan does this is determined by a "facts and circumstance" test.)
How does the Code determine if a plan is operating in a discriminating manner?
The text of the Code provides several "tests" that can be performed on plans to determine whether or not they discriminate in favor of HCIs. Cammack LaRhette Consulting can arrange for your plans to be tested.
Red Flags: Because the non-discrimination tests are quite complicated, there are many ways in which a plan can run afoul of the non-discrimination rules that are now applicable to non-grandfathered fullyinsured plans. However, the following are a few plan design red flags:
• Basing eligibility for certain plans on compensation levels, shareholder status, or officer status;
• Differences in waiting periods within a plan;
• Treating employees differently within a plan on the basis of age, years of service, or compensation;
• Differences in coverage and employer contribution
What happens if plans are not in compliance?
For self-insured plans, discriminating in favor of HCIs results in much greater tax burdens for the HCIs. However, for fully-insured health plans, violating the non-discrimination provision could mean employer tax penalties amounting to $100 per day per favored HCI and a civil suit brought by the government.
Is there any additional guidance?
Currently, there is no additional guidance. Most recently, the IRS issued notice 2010-63. Essentially a solicitation for public comments, Notice 2010-63, unlike many IRS notices, does not contain any specific guidance. Rather the notice reaffirmed how the ACA modified the Public Health Service Act, ERISA and the IRS Code and closed by stating:
The Department of the Treasury and the IRS are considering issuing guidance on the extension, through section 2716 of the PHSA and new section 9815 of the Code, of the requirements of section 105(h)(2) to insured group health plans. The Department of the Treasury and the IRS request comments on what additional guidance relating to the application of section 105(h)(2) would be helpful with respect to insured group health plans.