One of the things that PPACA (or health care reform, or even "Obamacare") adds to the mix of plan administration is the concept that insured health plans will now be subject to "discrimination testing" under IRS Code Section 105(h). Grandfathered plans do not have to comply, but a plan cannot likely be grandfathered forever. So if you have always a had an insured health plan and never thought about non-discrimination rules, here is a quick primer of what you have been missing.
In its simplest terms, 105(h) prevents employment-based health plans from "discriminating" in favor of highly compensated employees ("HCEs"). What this means is that you cannot have a plan that gives excessive or extra benefits to HCEs (defined as (a) one of the 5 highest paid officers in the company, (b) a shareholder owning more that 10% of the company stock, or (c) is among the highest paid 25% of all employees). If the plan discriminates, then the HCEs must include a portion of the benefits as taxable income and employers must report that on their W-2s. Much the same way that a 401(k) plan gets tested, self-insured health plans have been dealing with this concept for years and now insured plans have to take a look.
There are three coverage tests and the plan must pass one of these three: (1) 70% of all employees benefit under the plan, (2) the plan benefits 80% of eligible employees and 70% of all employees are eligible, or (3) the plan benefits a nondiscriminatory classification of employees. Same 3 tests as apply for qualified retirement plans and, I might add, cafeteria plans if you are required to test those.
The IRS regulations require the plan to provide the same benefits for both HCEs and non-HCEs. Different benefit structures are treated as a separate plan for the purposes of the eligibility tests described above. The plan discriminates as to the benefit unless ALL benefits provided to participants who are HCEs are also provided to other participants. You will also have discrimination if you have higher reimbursement levels or better benefit structures for HCEs. So having an "executive only" buy-up plan that provides higher benefit payments looks an awful lot like discrimination.
The good news is that a plan will not be considered discriminatory simply because HCEs use it more than non-HCEs. Nor will utilization of optional benefits (like vision or dental plans) be considered discriminatory if all eligible employees can elect any of the benefits and either there is no required premium by an employee or the premium charged is the same for all employees. And we get to exclude from testing those who have less than 3 years of service at the beginning of the plan year, those who are younger than 25 at the beginning of the plan year, part-time and seasonal employees and employees covered by a collective bargaining agreement.
if the plan fails the discrimination test, the "excess reimbursement" to HCEs must be included in their gross income and taxed accordingly. If a plan provides maximum benefits to HCEs that is not provided to all other employee, there are also negative tax implications to HCEs, and probably to the company for not withholding on that imputed income.
So what does this mean? Well, unless your plan is grandfathered, you are going to have to test your insured health plans for "discrimination." That means that you have to look at what the tests require and figure out how to pass them. Eligibility, contributions and benefits will all become factors for consideration, as well as participation in each plan.