In Notice 2011-1, the Internal Revenue Service delayed enforcement of a rule adopted as a part of the Patient Protection and Affordable Care Act (the "Act"), which imposed on fully-insured group health plans nondiscrimination rules similar to those that have applied to self-funded medical expense reimbursement plans for decades. Absent this relief the Act's insured plan nondiscrimination requirement would have taken effect January 1, 2011 for calendar year plans.

Background

Before the Act, no benefits-related, nondiscrimination rules applied to fully insured group health plans. The reasons for this are historical. Congress was originally of the view that insurance underwriting considerations generally preclude or effectively limit abuses in insured plans. As a result of advances in insurance underwriting and increasing competition in the health insurance markets, however, Congress had a change of heart. The Tax Reform Act of 1986 added Internal Revenue Code § 89, which established a comprehensive set of nondiscrimination rules that applied to a broad range of welfare and fringe benefit plans including employer-provided group-term life insurance plans and accident and health plans.

Code § 89 was the subject of intense criticism. Despite some delays in the effective dates, and despite earnest attempts at simplification, intense lobbying pressure—particularly by small business interests—ultimately doomed the measure. Code § 89 was repealed in 1989, and the prior law rules were reinstated.

The Act adds new § 2716 to the Public Health Service Act (PHSA), under which fully-insured group health plans other than grandfathered group health plans must not discriminate on the basis of plan eligibility and benefits—based on the rules established by Code § 105(h)(2) (relating to prohibition on discrimination in favor of highly compensated individuals) that already apply to self-funded plans. In addition, "rules similar to the rules contained in" the following provisions of the Code will also apply to fully-insured plans:

  • Code § 105(h)(3) (relating to nondiscriminatory eligibility);
  • Code § 105(h)(3) (4) (relating to nondiscriminatory benefits); and
  • Code § 105(h)(3) (8) (applying the rules to controlled groups).

These requirements take effect for plan years commencing after September 23, 2010—or January 1, 2011 for calendar year plans.

The Act's insurance nondiscrimination rules are enforced under the PHSA (and not under the Code). Under PHSA, non-federal governmental plans and health insurance issuers in the group or individual markets are subject to a penalty of up to $100 per day for each individual with respect to which a failure to comply has occurred. No civil money penalty is assessed where the plan knew, or using reasonable diligence would have known, that the failure existed, or if the failure was due to reasonable cause and not to willful neglect, and the failure is corrected within 30 days from the date that the plan knew, or exercising reasonable diligence would have known, that the failure existed.

Notice 2011-1 Relief

Citing concerns raised in public comments in response to an earlier notice,1 and observing that regulatory guidance is essential to the operation of the statutory provisions, the Treasury Department and the IRS, as well as the Departments of Labor and Health and Human Services determined that:

"[C]ompliance with § 2716 should not be required (and thus, any sanctions for failure to comply do not apply) until after regulations or other administrative guidance of general applicability has been issued under § 2716."

Moreover, to provide group health plan sponsors time to implement any changes required as a result of the regulations or other guidance, the regulators explained that the guidance under PHSA section 2716 will not apply until plan years beginning a "specified period" after issuance.

This relief is welcome, to be sure, but it may be too late for employers that have already implemented plan design changes anticipating these rules.

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