Plan sponsors of insured medical plans that are not grandfathered will be relieved to know that the Internal Revenue Service (IRS) issued a notice delaying the compliance date for the new nondiscrimination requirements imposed by the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act of 2010 (together, the Health Care Reform Law). Under the Health Care Reform Law, insured medical plans that lose grandfathered status are required to be nondiscriminatory under rules "similar to" the rules that apply to self-insured medical plans (the 105(h) Rules, named after the section of the tax code containing those rules). This requirement was supposed to be effective for plan years beginning on or after September 23, 2010. However, the IRS notice delays the effective date of this requirement until after the IRS issues guidance on how plans should apply the new nondiscrimination rules. Until that time, insured plans will not be sanctioned for failing to comply with the nondiscrimination rules.
Drinker Biddle Note: The nondiscrimination rules do not apply to insured plans that are "grandfathered" under the Health Care Reform Law. For more information about grandfather status, please see our prior client alerts here and here.
Under the 105(h) Rules, a self-insured medical plan may not discriminate in favor of "highly compensated individuals" with respect to eligibility or benefits. Generally, a "highly compensated individual" is anyone who is:
- One of the five highest-paid officers;
- A shareholder who owns more than 10 percent in value of the employer's stock; or
- Among the highest-paid 25 percent of all employees.
Drinker Biddle Note: The delayed effective date for insured plans has no effect on the nondiscrimination rules that apply to self-insured plans; plan sponsors should continue to test their self-insured medical plans to ensure that the plans comply with the existing 105(h) Rules.
In its recent notice, the IRS acknowledges that regulatory guidance is essential to applying the new nondiscrimination rules, particularly in light of the many changes made by the Health Care Reform Law. Even seemingly simple questions need guidance. For example, does a "benefit" include the rate of employer contributions toward the cost of coverage? The IRS previously requested public comments on how to apply the new nondiscrimination rules and has supplemented that request and extended the date for submitting comments until March 11, 2011. When the IRS issues guidance, it expects that such guidance will not apply until plan years beginning after the guidance has been issued for some period of time. The other agencies charged with enforcing the new Health Care Reform Law, including the Departments of Labor (DOL) and Health and Human Services (HHS), have stated their agreement with the delayed effective date and the suspension of sanctions until additional guidance is issued.
Drinker Biddle Note: Under the Health Care Reform Law, a non-grandfathered insured plan which fails to comply with the nondiscrimination rules could be subject to excise taxes ($100/day/individual imposed by the IRS), civil monetary penalties ($100/day/individual imposed by HHS), or civil action to stop the discriminatory practices or provide other equitable relief (brought by the DOL). Note that the penalties are assessed based on the individuals affected by the discriminatory practices (i.e., the non-highly compensated individuals). In contrast, if a self-insured plan violates the 105(h) Rules, the highly compensated individuals who benefit under the plan lose the favorable tax treatment of those benefits.
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.