This article addresses a provision of the Health Care Reform Law that has not gotten as much press as some of the other provisions, such as the requirement to cover adult children to age 26 or the elimination of lifetime limits on coverage. It focuses on the high penalties that an employer may face if it pays a greater portion of the premiums for health insurance coverage for its executives than it pays for its other employees.
Before health care reform, the tax code imposed no limits on the extent to which an employer could subsidize fully insured health insurance policies. So long as the amount the employer paid towards the premiums was consistent with the terms of the insurance policy itself, an employer could discriminate in favor of its executives by paying 100% of the health insurance premiums for an executive while requiring other employees to pay all or a portion of the premium for health plan coverage. There are already nondiscrimination rules that apply to self-funded plans, which cause the benefits received under a discriminatory plan to be taxed to the executives who received them.
The Health Care Reform Law extended the nondiscrimination rules that apply to self-funded plans to fully insured plans that are not grandfathered. The effective date of this change is the first day of the first plan year beginning on or after September 23, 2010, or January 1, 2011, for a calendar year plan. The regulations that define these nondiscrimination rules are more than 20 years old and many aspects of their application are not clear. Because the regulations were written at a time when few employers provided major medical coverage on a self-funded basis, it is difficult to know how they will be applied in complex situations, such as related employers providing different health insurance plans for different businesses. However, one employer practice that is not likely to survive these new rules is the practice of an employer's paying a higher portion of the premium for executives than for other employees. It is likely that such a difference in premium structure will be considered discriminatory under health care reform. The IRS recently requested comments on how to apply this extension of the nondiscrimination rules to fully insured plans. In its request, the IRS also clarified that the penalty for failure to meet the nondiscrimination rules is the imposition of an excise tax on the employer sponsoring the plan in the amount of $100 per day for each employee against whom the plan discriminates. In other words, the excise tax will apply on a daily basis for each employee who is not highly compensated and who does not receive the discriminatory benefit. This can result in very high penalties for employers who provide larger insurance premium subsidies to their executive team than to other employees. (In contrast, the same non-discrimination rules applied to self-funded health plans result in taxable income to the highly paid participants). The employer is required to self report this excise tax on Form 8928. Because this new nondiscrimination rule is also a requirement under ERISA, a participant can sue to enforce it. So in addition to the excise taxes, an employer could face a lawsuit by participants demanding the same premium subsidies as the executives.
We can hope that the IRS clarifies the manner in which these nondiscrimination rules will apply to employer plans, including the identity of the non-highly compensated employees against whom plans are not permitted to discriminate. In the meantime, however, employers with insured, non grandfathered health plans should carefully review their insurance policies and strongly consider a uniform premium structure across all employee classifications.