The IRS issued Notice 2010-63 inviting public comments on the application of rules prohibiting insured group health plans from discriminating in favor of highly compensated individuals (HCIs). Under the Patient Protection and Affordable Care Act (PPACA), Internal Revenue Code (Code) Section 105(h) nondiscrimination rules (previously only applied to self-insured group health plans) are applied to non-grandfathered insured group health plans. This provision of PPACA is effective for non-grandfathered group health plans as of the first day of the plan year beginning on or after September 23, 2010. Although the application of the nondiscrimination requirements of Code Section 105(h) will be similar for self-insured and non-grandfathered insured plans, the consequences for noncompliance are different. Under a self-insured plan, the penalty for failing the nondiscrimination test falls mainly on the HCIs receiving the discriminatory benefit. Specifically, the HCIs receiving the discriminatory benefit must recognize the excess benefit as taxable income. In contrast, the penalty for failing the nondiscrimination test for a non-grandfathered insured plan is applied to the plan sponsor. As the IRS Notice highlights, the penalty for a discriminatory non-grandfathered insured plan is an excise tax or civil monetary penalty of $100 per day per individual discriminated against (all of the non-highly compensated individuals (NHCIs)). As an example, an employer with 200 NHCIs who sponsors a non-grandfathered insured plan that discriminated in favor of at least one HCI, would be subject to a penalty of $20,000 (200 x $100) a day for each day the plan was found to be discriminatory. For purposes of the 105(h) nondiscrimination rules, an HCI is generally defined as an individual who is (i) one of the five highest paid officers; (ii) a shareholder who owns more than 10 percent in value of the stock of the employer; or (iii) one of the highest 25 percent of all employees (some employees such as part-time employees and employees covered by a collective bargaining agreement can be excluded). Although this Notice describes the penalty for failing this nondiscrimination test, we continue to wait for clear guidance on exactly how this test should be applied to non-grandfathered insured plans. Generally, the non-discrimination provisions of Code Section 105(h) prohibit discrimination in favor of HCIs for purposes of either eligibility or benefits. This could implicate a variety of arrangements such as plans that cover only a select group of management employees (such as an executive health plan), or a health plan that provides reduced premiums for executives. Also, a severance agreement for a departing HCI that included post-employment health coverage may also violate this rule if the coverage is not generally available to all employees upon termination. In light of the severe penalty associated with this new PPACA provision, plan sponsors should review their group health plans and related arrangements to determine if they may be at risk.