On September 20, 2010, the Internal Revenue Service released IRS Notice 2010-63 (to be published in the Internal Revenue Bulletin on October 12, 2010). The Notice relates to the extension of the Internal Revenue Code Section 105(h) nondiscrimination rules to fully insured, medical plans. Prior to the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act these rules only applied to self-insured arrangements. Effective for plan years beginning on and after September 23, 2010, similar nondiscrimination rules also will apply to fully insured employer-sponsored medical plans.
Although the stated purpose of Notice 2010-63 is to request comments on future guidance to be issued in connection with the extension of the non-discrimination rules to fully insured arrangements, Notice 2010-63 raises some important points to consider, particularly as these rules may apply to executive medical plans or arrangements, namely:
- It is not uncommon for an employer to maintain executive medical coverage for its top executives. Many times, this coverage may be provided pursuant to the terms of an employment agreement negotiated with the executive as part of the executive's overall compensation and benefits package. In the past, these fully-insured arrangements were not subject to the Internal Revenue Code nondiscrimination requirements; however, this may no longer be the case following the changes implemented under the Patient Protection and Affordable Care Act.
- The excise tax for an insured plan's failure to comply with these nondiscrimination requirements is calculated at $100 per day for each individual to whom the failure relates. In Notice 2010-63 the IRS has indicated the individuals "to whom the failure relates" are those employees discriminated against. This suggests that the penalty tax for maintaining a discriminatory insured medical plan will be calculated not by counting the number of highly compensated employees who are covered by the arrangement, but by counting the number of employees who are not covered by the arrangement. For example, if an employer has 500 employees and provides fully insured executive medical coverage to three of its top-paid employees, IRS personnel have indicated that the excise tax for maintaining such a discriminatory insured medical plan would be $49,700 per day ($100 per day multiplied by 497, the number of employees not provided coverage)!
- While grandfathered fully insured plans are exempt from the non-discrimination requirements, the plans must satisfy the requirements to be grandfathered under the recently issued Interim Final Regulations. Those regulations include the requirement that a "grandfathered plan notice" be conspicuously included in plan documentation and it appears that such a requirement would apply to an executive medical plan. Given that an executive medical plan may be a negotiated arrangement, an employer may have a fully insured executive medical plan, which consists solely of an insurance contract and general correspondence between the employer and the covered executives.
- How will these rules apply to a "one-off" arrangement? Depending on the particular facts, an arrangement which covers only a single individual may not rise to the level of a "plan" under ERISA or the Internal Revenue Code. Alternatively, a fully insured plan covering only a single current employee or providing stand-alone excepted benefits (such as limited dental or vision coverage) may be exempt from the nondiscrimination rules and certain other provisions of health care reform. Note, however, if an employer maintains separate arrangements with more than one employee, the Internal Revenue Service may try to aggregate those arrangements as a single plan covering multiple employees for nondiscrimination and health care reform compliance purposes.
Many questions remain to be answered. Future IRS guidance may shed light on many of these issues. However, given the potential magnitude of this excise tax on employers who maintain discriminatory insured plans, employers should take inventory of any executive medical arrangements which they may have and identify whether those arrangements are plans which may qualify for grandfathering or whether such arrangements should be terminated before year end. Additionally, where an executive medical plan is eligible for grandfathering, plan sponsors will need to make sure that they have provided the required grandfathered plan notice and otherwise taken all necessary steps to protect the grandfathered status of the plan or arrangement.