Although it is not yet in effect, or fully defined, Section 2716 of the Public Health Service Act was revised under PPACA to provide that the anti-discrimination provisions of IRS Code Section 105(h) would apply to insured health plans. While we are waiting for these regulations to be written, I thought it would be beneficial to review how the discrimination testing provisions in the Code generally apply.
Section 105(h) prevents a self-insured health plan from "discriminating" in favor of highly compensated employees, either with respect to eligibility or benefits provided. Since it only applies to self-insured plans, employers sponsoring insured health plan are generally not concerned with limiting eligibility to obtain that coverage. While the new rules for insured plans have yet to be written, 105(h) as it sits presently generally provides that unless the plan benefits 70% or more of all employees (or 80% of the 70% who are eligible), it would be discriminatory. There are certainly other factors to keep the plan qualified, but for the purposes of this review, I am focusing on this eligibility and "benefit" issue. Section 125, that creates cafeteria plans, contains a provision that provides that 105(h) applies to them as well.
This is slightly different from the discrimination provisions for retirement plan. Under Section 401(a)(4), a qualified retirement plan cannot discriminate in favor of highly compensated employees. Then, in Section 410(b), there is a requirement that the plan benefit a percentage of employees who are not highly compensated which is at least 70% of the highly compensated employees benefiting under the plan. Instead of looking at "all employees," retirement plan testing looks at ratios of highly compensated to non-highly compensated employees. Similar concerns, but not exactly the same.
I am not intending this to be a definitive analysis of discrimination testing, but rather I think it is important for employers to know that there are more than one set of rules for discrimination testing for employee benefit plans. Employers who have insured health plans, but also offer retirement plans, may be familiar with 401(k) plan testing and might incorrectly assume that 105(h) testing (when implemented) would be the same. But it is not exactly the same. So, assuming the rules for non-discrimination for insured health plans follow 105(h) as it is presently written, it is important be be aware the distinction exists. Just because your retirement plan passes testing does not mean that your insured health plan will be non-discriminatory simply because it has the same eligibility rules and comparable participation.
When the new rules for 105(h) compliance finally come out, we can do a deeper analysis. But for now, remember: same, but different. And don't hesitate to ask you lawyers at Fox Rothschild for help if you have questions about discrimination testing in any of your benefit plans.