New Nondiscrimination Tests for Group Health Plans
September 21, 2010
Effective for plan years beginning on or after September 23, 2010, the Patient Protection and Affordable Care Act ("PPACA") extends nondiscrimination requirements of the Internal Revenue Code to fully insured group health plans, except for “grandfathered" plans that were in existence on March 23, 2010 when PPACA was signed into law. It is important to note, however, that there still are many unanswered questions about when a group health plan loses its grandfathered status and the U.S. Department of Health and Human Services ("DHHS"), which is responsible for implementing PPACA, is working on guidance on what changes do or do not jeopardize a plan's grandfathered status. Unfortunately it is not likely that the guidance will be issued before September 23.
Employers with self-insured health plans have been subject to nondiscrimination testing for many years as have the various benefits (including health plan benefits) under cafeteria plans (Internal Revenue Code section 125) provided by employers. Now, under the provisions of PPACA, fully-insured employer provided health plans will be subject to nondiscrimination testing for the first time. While this initially will impact health plans implemented after March 23, 2010, it will be critical for employers to monitor guidance regarding changes that could cause their plan to lose its grandfathered status, which would then subject the plan to these nondiscrimination rules.
Under the new nondiscrimination rules, fully insured group health plans need to, generally, meet two requirements. First, a health plan cannot discriminate in favor of highly compensated individuals as to eligibility to participate; meaning a plan must, generally, demonstrate that it benefits at least 70 percent of all employees. Second, a plan cannot discriminate in favor of participants who are highly compensated individuals as to benefits that are provided; meaning that all benefits made available to highly compensated individuals must be made available to all other plan participants and their dependents. Different levels of benefits such as co-pays, deductibles, and/or provider networks cannot be offered to highly compensated participants if those same levels of benefits are not offered to all other participants.
While there are similarities between the nondiscrimination requirements for cafeteria plans and those that insured group health plans will now be required to follow, there also are substantial differences. The definition of highly compensated employees differs significantly and tests that are used to determine if benefits are being given disproportionately to highly compensated executives are also not the same.
Further, it is important for employers to note that the nondiscrimination rules apply on a controlled group basis. Thus, the health plans of the related businesses will, generally, be required to be tested as if they are a single employer. Depending on the demographics of the individual entities within the controlled group, the testing could result in a cut-back in benefits for highly compensated employees of entities that would otherwise pass the nondiscrimination testing, if tested alone. Additionally, it will be important for the guidance from DHHS to include guidance on whether the grandfathered status of all the plans of a controlled group will be lost if a plan of one member of the controlled loses its grandfathered status
Penalties for Noncompliance
Health plans that do not comply with the new requirements may face excise taxes of $100 per day for each employee whose benefits are not in compliance capped at 10 percent of the cost of the group health plan or $500,000, whichever is less.
Impact on Provision of Benefits
The nondiscrimination requirements may make some special executive health care benefits obsolete, specifically retiree health plans for executives. Frequently, employers have a self-insured group health plan for all of their active employees and provide a retiree health plan only to a select group of highly compensated or executive employees. This type of practice was acceptable under prior law as long as the retiree health plan was fully insured. Under the new requirements, it will not be possible to discriminate in this manner. Accordingly, if an employer did not have such a fully insured plan in place prior to March 23, it will not be able to provide these benefits in the future unless it also provides retiree health care to non-highly compensated retirees. Given that most employers have been cutting back or terminating retiree health benefits, the expansion of such benefits seems unlikely.
The nondiscrimination requirements also mean that employers will be largely prohibited from providing different coverage or different employer subsidies for different classes of employees. Many employers currently offer one plan or subsidy level to management employees and a less generous subsidy level to lower-level employees. Under the new nondiscrimination rules these types of plans will likely be restricted, although discrimination within the boundaries of the new rules is acceptable. For example, there are rules allowing short-term and seasonal workers to be excluded from coverage under a health plan.
For employers with grandfathered plans, it will be critical to understand what is required (once guidance is issued by DHHS) to maintain a plan's grandfathered status and to be prepared to conduct nondiscrimination testing if changes are made to plans that would cause a loss of grandfathered status. For health plans established after March 23, 2010, it will be critical for the employer either to conduct the nondiscrimination testing itself or to engage a competent third party to conduct the testing in order to avoid the severe excise taxes imposed under the law.
For more information, please contact Peter Alwardt or your EisnerAmper professional.
This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.