Many benefits and health insurance rules were affected by the Patient Protection and Affordable Care Act (PPACA) signed into law on March 23, 2010. One of the requirements that became effective on September 23, 2010 (and amended the Public Health Service Act (PHSA) by adding Section 2716) was for non-grandfathered, fully insured plans. For the first time, fully insured medical plans must apply non-discrimination benefit rules. Previously, only self-funded plans were required to apply these rules.
Non-Discrimination Rules: What They Are.
In essence, the non-discrimination rules make sure that employer sponsored plans do not discriminate in favor of highly compensated employees (HCE). In particular, plans cannot discriminate in the areas of eligibility to participate or in the benefits offered to every class of employee. Interestingly, these rules do NOT apply to “grandfathered” plans, so those can continue to discriminate in favor of HCEs.
Who Are Highly Compensated Employees?
Highly compensated employees are those who are:
- One of the five highest-paid officers, or
- A shareholder owning more than 10% of the company’s stock, or
- Among the highest paid 25% of all employees
Note that these definitions are not mutually exclusive. The five highest paid officers could also be among the highest paid 25% of all employees. However, if one of the top five officers is not in that pay range, that officer still needs to be classified as a highly compensated employee.
The Tests.
Eligibility Test. For a plan to be considered nondiscriminatory with respect to eligibility, it must pass one of two numerical “coverage” tests. The two tests are:
- Seventy percent of all employees are covered under the plan, or
- The plan covers at least 80 percent of eligible employees and 70 percent of all employees are eligible for coverage
If the employer fails either of the above tests, a plan will be considered as providing discriminatory benefits.
Excluded Employees. Some employees can be excluded from the eligibility tests. They include:
- Employees with less than three years of service at the beginning of the plan year;
- Employees who are younger than age 25 at the beginning of the plan year;
- Part-time or seasonal employees;
- Employees who are covered under a collective bargaining agreement;
- Nonresident aliens who receive no income from a U.S. source.
The IRS mandates that the plan must provide the same benefits for both highly compensated and non-highly compensated employees. However, if a plan provides different benefits to different groups of employees (e.g., different waiting periods), each benefit is treated as a separate plan and the eligibility tests described above need to be applied for each. If any one benefit fails the tests, that benefit difference cannot remain if the plan is to remain compliant.
Benefits Test. In addition to the eligibility rules, all benefits provided to highly compensated employees must also be provided to all other employees. This is called the Benefits Test. A plan will be considered discriminatory unless all employees, both highly compensated individuals and those not meeting that definition, receive the same benefits. If one group receives a greater choice of benefits or more favorable benefits, including higher benefit amounts, lower premiums, or a higher employer subsidy, the group health plan would not pass nondiscrimination – it would be considered discriminatory.
Since the non-discrimination rules for self-funded plans were first issued in 1980, employers have turned to fully insured plans to provide executives with tax-free reimbursements for out-of-pocket health coverage expenses. The new PPACA prohibitions against discrimination in fully insured plans may force employers to consider other ways of compensating their executives and other key, high earning employees.
Penalties for Non-Compliance.
Employer sponsored plans that do not comply with these new requirements may face:
- IRC excise taxes of $100 per day for each employee whose benefits are not in compliance, capped at 10% of the cost of the group health plan or $500,000, whichever is less.
- Potential ERISA suits for equitable relief (injunctive relief or benefits owed).
Plans that violate these requirements could be discovered during an IRS audit or during an Employee Benefits Security Administration (EBSA) investigation that was prompted by a participant complaint.
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