The nondiscrimination rules under Section 105(h) of the Internal Revenue Code have applied to self-insured health plans for over 30 years. However, the recently enacted Patient Protection and Affordable Care Act 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Legislation”), now imposes nondiscrimination rules on fully-insured, non-grandfathered plans for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans). Generally under the new nondiscrimination rules, a fully-insured health plan is not permitted to discriminate in favor of highly compensated individuals with respect to either eligibility or benefits provided under the plan.
Unlike the nondiscrimination rules for self-insured plans, a violation of the nondiscrimination rules for fully-insured plans will potentially have financial implications for the plan and plan sponsor, but not the highly paid individuals. Under the new provisions in the Health Care Reform Legislation, a violation of the nondiscrimination rules for fully-insured plans will result in an excise tax on the plan. The maximum excise tax will be determined in the same manner that the excise tax is determined for a violation of the current HIPAA requirements (generally equal to $100 per day per participant).
Since the nondiscrimination rules have not historically applied to fully-insured plans, many employers may have existing discriminatory arrangements (i.e., executives pay significantly lower premiums than other employees, executives are permitted to either enter the health plan earlier than other employees or to be covered in the health plan for a significant period of time after they terminate employment). No additional guidance has been issued yet with respect to how these nondiscrimination rules will apply to fully-insured plans; however, the provisions in the Health Care Reform Legislation state that rules similar to the nondiscrimination rules that apply to self-insured plans will apply.
Q&B Key: At this time, we would recommend that employers with non-grandfathered fully-insured arrangements review their plans and employment agreements to determine whether any potential discriminatory practices exist and consult with their advisors to determine whether changes should be made at this time.