United States: The Affordable Care Act—Countdown To Compliance For Employers, Week 3: Group Health Plan, Cafeteria Plan And Health FSA Nondiscrimination Theory And Practice

Last Updated: December 9 2014
Article by Alden J. Bianchi

As applicable large employers grapple with the Affordable Care Act's (ACA) employer shared responsibility (pay-or-play) rules, two questions arise with notable frequency:

  • Do I have to offer the same group health insurance coverage on the same terms to all my full-time employees?
  • Do I have to offer pre-tax treatment of premiums to all my employees?

These questions—which arise under Internal Revenue Code §§ 105(h) and 125, and Public Health Service Act § 2716—are important as employers endeavor to navigate the penalty provisions of Code § 4980H. They are particularly relevant in the case of employers that previously did not offer coverage to a large group of employees (e.g., in industries such as staffing, restaurants, retail, hospitality and franchising, among others). As we explain below, what makes these questions challenging is that theory varies widely from practice for various reasons. The present issues are ripe for regulatory attention, and it is entirely likely that today's answers will not be tomorrow's answers.

Fully-insured Group Health Plans

Other than a brief period two decades ago, before the ACA there were no non-discrimination standards that applied to fully-insured group health plans. The ACA changed that in newly added Public Health Service Act § 2716, the provisions of which are incorporated into the Internal Revenue Code and ERISA. Enforcement of these new group health plan non-discrimination rules has been delayed indefinitely, however, by IRS Notice 2011-1. So, where the question involves a fully-insured group health plan, the answer is simple: at least for now, an employer is currently free to offer different group health insurance coverage to different groups or cohorts of full-time employees with impunity. This will change, of course, once the regulators get around to issuing regulations.

In 1978, when Congress first turned its attention to group health plan non-discrimination, it was of the (subsequently discredited) view that carrier underwriting rules would be sufficient to curb discriminatory plan designs in the case of fully-insured arrangements. Congress had a change of heart, and in the Tax Reform Act of 1986 added the now infamous "Code § 89," which established a mind-numbingly complex set of nondiscrimination rules that applied to a broad range of welfare and fringe benefit plans, including employer-provided group health plans. Proposed regulations issued in 1989 were the subject of intense criticism. Despite some delays in the effective dates, and in spite of an earnest attempt at simplification, intense lobbying pressure (particularly by small business interests) ultimately doomed the measure. Code § 89 was repealed in 1992 (retroactive to 1989). In the process of writing rules under the ACA, the regulators are no doubt mindful of the frosty reception given the 1989 proposed rules.

For a comprehensive discussion of the issues that confront the regulators as they craft non-discrimination rules under Public Health Service Act § 2716, please see the August 3, 2012 comment letter submitted by the American Bar Association Tax Section and a separate outline on the subject prepared by Helen Morrison, Ernst & Young LLP and Linda Mendel, Vorys, Sater, Seymour and Pease LLP.

Self-funded Group Health Plans

Self-funded group health plans are a different matter. Since 1978, Code § 105(h) has imposed rules governing discrimination on the basis of eligibility or benefits. Failure to follow these rules results in the taxation of "excess benefits" in the hands of highly compensated participants. (For a summary of the Code § 105(h) non-discrimination rules, click here.) But an understanding of these rules, no matter how thorough, comprehensive, or accurate, obscures the practical reality: the rules are rarely followed or enforced. And where employers do attempt to follow them, the compliance testing methods adopted by one employer are unrecognizable to another employer following the same rules! This too is likely to change once the regulators turn their attention to group health plan non-discrimination issues generally.

Cafeteria Plans

Cafeteria plan non-discrimination poses an even more daunting problem for two reasons: first, there is not one but up to four non-discrimination tests that apply; and second, there are no final regulations telling us how these rules work. In 2007, the Treasury Department and the IRS issued a comprehensive set of proposed cafeteria plan rules, with particularly detailed non-discrimination provisions. These proposed non-discrimination rules are quite strict. Different levels of employer contributions to the same plan, for example, could trigger a violation. Because the proposed rules are all the guidance we have on the subject, some practitioners treat them as authoritative. They are not. Different levels of employer contributions, for example, are commonplace. This does not mean that there are no rules, however. The statute itself is clear that cafeteria plans may not freely discriminate. A cafeteria plan covering only, say, a (highly paid) headquarters group, will be discriminatory based on any reasonable reading of the statute. Beyond that there is little agreement as to where one might draw the proverbial line.

But for the ACA, the proposed 2007 cafeteria plan rules would likely be in final form by now. The regulators will complete this project at some point. When that happens, compliance with the non-discrimination rules will take on a new urgency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Alden J. Bianchi
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions