The IRS delayed application of the nondiscrimination rules under Internal Revenue Code section 105(h) to fully-insured group health plans. This IRS notice is welcome relief to employers who lacked any substantive guidance on how to structure their group health plans and other arrangements to comply with these rules.
The Affordable Care Act1 extends nondiscrimination rules “similar to the rules” contained in Code section 105(h) to fully insured group health plans. Code section 105(h), which applies only to self-insured medical reimbursement plans, prohibits plans from discriminating in favor of highly compensated individuals with respect to eligibility to participate in, and benefits provided under, such plans. Non-grandfathered fully insured group health plans are required to comply with “similar” nondiscrimination rules on the first day of the first plan year beginning on or after September 23, 2010. Noncompliant fully insured group health plans are subject to an excise tax of up to $100 per day, per affected individual.
According to IRS Notice 2011-1, fully insured group health plans will not be required to comply with the nondiscrimination rules, and no excise tax under the Code will apply, until further guidance has been issued. Further, to give plan sponsors time to implement any changes required for compliance, it is likely that future guidance will not apply until plan years beginning at some time after the additional guidance has been issued.
The Affordable Care Act’s expansion of the Code Section 105(h) nondiscrimination rules to fully insured plans may also impact employment and severance agreements that provide executives and other highly compensated employees health insurance benefits not also provided to rank-and-file employees, such as company-paid COBRA premiums following termination of employment. IRS Notice 2011-1 requested comments on numerous issues by March 11, 2011.