Application of Nondiscrimination Rules under Healthcare Reform Have Been Delayed

Bottom line, fully insured plans are not required to comply with these new non-discrimination restrictions for the foreseeable future, or most likely at least through the current plan year (which for many just begins on January 1, 2011, and thus would not be of impact at the earliest until the 2012 plan year). 

Details

In a move akin to delaying Christmas after all the hard work of shopping, wrapping and baking is done, the IRS (and the Departments of Labor and Health and Human Services) have delayed compliance with the nondiscrimination requirements of the Patient Protection and Affordable Care Act ("PPACA") until after regulations or other administrative guidance are issued (IRS Notice 2011-1).  The nondiscrimination rules would otherwise apply to insured, non-grandfathered group health plans for plan years beginning after September 23, 2010. Grandfathered insured plans were required to comply beginning with the 2014 plan year, or the first plan year grandfathered status is lost, if earlier.

Background on Nondiscrimination Rules

The PPACA requires insured group health plans to satisfy the requirements of section 105(h)(2) of the Internal Revenue Code ("Code"). Code Section 105(h)(2) prohibits discrimination in favor of highly compensated individuals as to eligibility to participate, and benefits provided. A highly compensated individual is defined as one of the five highest paid officers of the employer, a 10 percent or greater shareholder, or (with some exclusions) an individual among the highest paid 25% of all employees when ranked by compensation. Section 2716 also provides that "rules similar to" the nondiscriminatory eligibility classification test, nondiscriminatory benefits test and the controlled group rules of Code Section 105(h)(3), (4) and (8), respectively, shall apply. Failure to satisfy these requirements could result in a hefty excise tax being imposed on the employer: $100 per day per individual discriminated against.

In September, Notice 2010-63 requested comments about the guidance needed in order to satisfy the nondiscrimination requirements. In addition to guidance concerning the meaning of "rules similar to" Code Section 105(h), commentators noted that compliance prior to 2014, when the State Exchanges and individual and employer responsibility and penalty provisions take place, would be difficult without substantial guidance. The Notice acknowledges that guidance is required with respect to such questions as to whether the rate of employer contribution is a "benefit" that must be provided on a nondiscriminatory basis, whether the nondiscrimination standards can be applied separately to distinct geographic locations, how the rules apply to expatriates and inpatriates, treatment of employees who voluntarily waive coverage, and whether paying for the coverage of highly compensated individuals on an after-tax basis affects the nondiscrimination requirements, among other things.

Comments will be accepted by the IRS on the application of the nondiscrimination requirements until March 11, 2011. It seems unlikely we will see proposed regulations until close to the end of 2011, at best.Employers who have already adjusted health plan eligibility and premium contributions in an effort to comply with the Affordable Care Act may wish to re-evaluate the changes made. Keep in mind, however, the Code Section 125 rules for changing pre-tax premium payments once the plan year has begun: changes in elections are only permitted in limited circumstances -- unless, of course, we receive Section 125 relief in connection with this 11th hour nondiscrimination reprieve.

A Word about Grandfathering

Because grandfathering is a one-time opportunity for the first renewal subsequent to September 23, 2010, we recommend groups consider grandfathering their plans if they have a reason to believe they may have discrimination problems within their plans.  The good news is this ruling gives us time to work with those groups to find solutions to the nondiscrimination issues.  Hopefully, the IRS will issue regulations that are workable as the previous rules clearly were not.

We are monitoring this fluid situation and will keep you apprised of any developments.