We recommend that employers take the time review their health plans to determine if changes need to be made based on the current testing requirements.
Last year’s Patient Protection and Affordable Care Act (the Act) required nondiscrimination testing for the first time on insured, non-grandfathered group health plans. This raised significant questions and concerns for a variety of organizations. On December 22, 2010, however, these organizations were given a reprieve: the new rule was put on hold until the IRS can issue further regulatory guidance.
Although this delay comes as a relief, remember that it’s just that — a delay. The testing rules for insured plans may be similar to the current rules that are in effect for self-insured plans, and penalties may be significant to insured non-grandfathered employers that sponsor health and welfare plans that don’t pass the testing. We recommend that employers take the extra time to review their health plans to determine if changes need to be made based on the current testing requirements.
All employers who sponsor insured health and welfare plans that don’t qualify for grandfathered status are affected by nondiscrimination testing. The following plan designs may fail testing unless changes are made:
- Insured medical plans that cover only highly compensated individuals.
- Insured plans for which highly compensated individuals pay a lower premium than others.
- Insured plans with a shorter waiting period for highly compensated individuals (HCI) than non-highly compensated individuals.
- Plan design options that are only available to certain groups, locations or employee classifications.
- Contribution requirements that are based on classifications that aren’t specifically excluded, such as collectively bargained groups.
To avoid potential penalties, determine whether your plans are discriminatory under the current rules for self-insured plans. Doing so may save an employer tens of thousands of dollars in excise tax penalties.
Still Up for Discussion
There are a variety of basic questions that affect insured plans for which the IRS is expected to provide guidance:
- What constitutes nondiscriminatory benefits, and what’s included in the term “benefits”? For example, is the rate of employer contributions toward the cost of coverage or the duration of an eligibility waiting period treated as a “benefit” that must be provided on a nondiscriminatory basis?
- What is the application of the nondiscrimination testing to insured group health plans beginning in 2014, when the health insurance exchanges become operational and the employer responsibility provisions, the premium tax credit, and the individual responsibility provisions and related Act provisions are effective?
- Should the nondiscrimination standards be applied separately to employers sponsoring insured group health plans in distinct geographic locations? Moreover, should these standards on a geographic basis be permissive or mandatory?
- How will employees who voluntarily waive employer coverage in favor of other coverage be treated?
- What will be the transition rules following a merger, acquisition, or other corporate transaction?
Insights Reflecting What We Know
While we don’t know the final requirements, there’s speculation that the new requirements will be similar to the current provisions under IRC Section 105(h). If this comes to fruition, the following insights may apply.
There are two types of nondiscrimination tests: the Eligibility Test and the Benefits Test. The test group for the Eligibility Test consists of all employees except:
- Employees with less than 3 years of service at the beginning of the plan year.
- Employees who have not attained age 25 before the plan year.
- Part-time and seasonal employees.
- Employees covered by a collective bargaining agreement.
- Nonresident aliens who do not receive U.S.-source earned income.
The plan cannot discriminate in favor of HCIs in regards to participation eligibility. HCIs include:
- One of the five highest paid officers.
- A shareholder who owns more than 10 percent of the value of the stock of the employer.
- An individual who is among the highest paid 25 percent of all employees.
The eligibility test is not simply to determine if enough employees are “eligible” to participate but also to consider those who are actually covered.
The Benefits Test looks at equality of contributions, equality of maximum benefit, and discrimination in plan operation. As noted above, collectively bargained plans are excluded from eligibility testing; however, they are not exempt from the Benefits Test.
Consequences of Failure
One likely reason for the delay in the application of the testing is that the current guidance about how penalties apply lacks clarity. We do know that if the plan fails nondiscrimination testing, the employer may be subject to an excise tax of $100 for each day for each employee to whom such failure relates. For a group that covers 100 non-HCEs, this is an excise tax of $10,000/day for each day the plan is noncompliant!
For now, nondiscrimination testing is on hold, but we don’t expect that to last. There are clear indications that the administration is serious about requiring nondiscrimination testing for insured plans similar to the requirements currently applicable to self-insured plans.
The IRS is still requesting public comments until March 11, 2011. Comments can be submitted to the Internal Revenue Service, CC:PA:LPD:RU (Notice 2011-1), Room 5203, PO Box 7604, Ben Franklin Station, Washington DC 20224.